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Cannan, Edwin 












CI 641 


1 T» -fc^*.-*** 

Cannan, Edwin, 1861-1935. 

Wealth ; a brief explanation of the causes of economic wel- 
fare, by Edwin Cannan ... London, P. S. King & son, 1914. 

xxlli, 274 p. 19 cm. 

"The book ... has ... been evolved out of the annual course of lec- 
tures ... given for first-year studerjts at the London school of economics 
since 18i>8."— Pref. 

1. Economics. 2. Wealth. 

New Haven. Free Pub. / 
for Library of Congress 

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The really fundamental questions of 
economics are why all of us, taken 
together, are as well off— or as ill off, ff 
that way of putting it be preferred—as 
we are, and why some of us are much 
better off and others much worse off than 

the average. 

I am convinced that immense harm is 
done by the common assumption that the 
answers to these questions are so obvious 
and easy that no general treatment of them 
is necessary. We should not tolerate a 
person who professed to explain the inef- 
ficiency of some locomotive and to provide 
a remedy for it, if we knew that he had 
never studied mechanics and was quite 
ignorant of the construction and working 
of locomotives. The existing economic 
organization is a much more complicated 
and delicate piece of machinery than a 
locomotive, and yet, whenever some imper- 
fection in the work done becomes par- 
ticularly prominent, we are overwhelmed 
with suggestions about causes and reme- 
dies by persons who have not the smallest 
general knowledge of the reasons why the 




machinery works at all. It often happens 
that a man of considerable eminence in 
his own profession, but without the 
smallest acquaintance with the funda- 
mentals of economics, will make a sugges- 
tion which is precisely on a level with the 
proposition that the locomotive would be 
much more efficient if its weight were 
taken off the driving wheels so that they 
could revolve more easily. The editor of 
an important magazine accepts with joy 
the contribution in which he develops his 
idea, and the public feebly thinks there 
may be something in it, and is confirmed 
in this view by the fact that professional 
economists are as disinclined to publish a 
refutation of it as the Astronomer Royal is 
to answer the theorists who declare that 
the world is flat. 

It is not refutation of ridiculous sugges- 
tions which is required, but their non-ap- 
pearance in consequence of there being no 
possibility of their gaining acceptance in 
minds already occupied by a knowledge of 
the actual nature and working of the 
economic machine. When, therefore, I 
tire the reader with insistence on some- 
thing which appears to him too obvious 
to need mention, I hope he will ask him- 
self whether he does not know of some 
important propaganda, or of some oppo- 



sition to some important reform, which is 
based on a doctrine incompatible with the 
acceptance of that which seems to him 
to be obvious. I refrain from giving 
examples, because I would rather that all 
the various propagandists and their oppo- 
nents should read the book than that 
some of them should be warned off it as 
dangerous to their faith. 

Experienced teachers, in search, as 
usual, of the heaven-sent book to use in 
their classes, are not likely to complain 
of obviousness. They are much more 
likely to say that much of my matter is 
too difficult for beginners. But I doubt 
the policy of trying to teach beginners only 
what is easy. We must take things as 
they come, and if in economics, as in some 
other things, we find that the foundations 
are the most difficult part of the work, 
that is no reason for trying to build a 
superstructure without any foundations at 
all. I hope, therefore, that the book may 
be found useful by academic teachers and 
students as well as by readers who wish 
to improve their capacity for dealing with 
practical economic problems without 
attendance at lectures and classes. It has, 
at any rate, been evolved gradually out of 
the annual course of lectures which I have 
given for first-year students at the London 

11 > 



I ii 



School of Economics since 1898, during 
which period I do not think a year has 
passed without considerable changes in 
the matter or the arrangement of the 

Having acute sympathy with those who 
dislike ponderous tomes, I have tried to 
keep the book as short as possible. A 
great deal of the discussion of wages, 
profits, and rent which had some local 
importance a hundred years ago is now 
obsolete, and should be relegated to the 
works which deal with the history of 
theory. By omitting this and other obso- 
lete matter, by excluding special subjects 
like currency and taxation, which are 
better considered in special treatises, and 
by forgoing detail and picturesque illus- 
tration, I have managed to make room for 
some very fundamental matters which are 
often ignored in general treatises of 
moderate length. I refer especially to the 
hereditary character of inequalities of 
income, the inferiority of women's earn- 
ings, and the differences in the wealth of 
different " countries " or " nations." 


London School of Economics 
AND Political Science. 
Xovcitibcr, 1913. 




The Subject- Matter of Econoiviics 


The subject-matter of economics must be taken to be 
whatever can be most conveniently treated under 
economics. This is a question of the convenient 
delimitation of the various departments of Science, on 
which common practice is a good guide 

Special attention has often been given to the wealth 
of nations, but even when economics has been defined as 
the science of the wealth of nations, much other matter 
has been included in practice, so that the wealth dis- 
cussed has been the wealth of human beings generally . 

The word wealth first meant a particular state or condi- 
tion of human beings, but subsequently, especially in 
formal definitions, it was applied to the things supposed 
to make a person attain that condition, and was am- 
biguously used both of the collection of things possessed 
at a point of time and of the collection produced or 
coming in during a certain length of time 

But since the middle of the eighteenth century the 
greater part of economic exposition has related to the 
second of these collections, which was first called 
"produce" and more recently "income" 

Produce, or income, is not easy to define or measure, 
and the effort to define and measure it has resulted in the 
substitution of " utility " or " satisfaction " as the subject- 
matter of economic study, disutilities and dissatistactions 

la '>= 







being taken as negative and deducted rom posUive utility 
or satisfaction. If we accept this result m substance, and 
yet retain " wealth" in the definition of economics, we 
must regard wealth as having reverted to its old meaning 
of a particular state or condition of human beings . 9-13 

The difficulty is to draw the line between wealth in 
this sense and other kinds of welfare. The criterion of 
exchangeability is unsatisfactory. The best we can do is 
to say that wealth is material welfare. The fac that the 
material shades gradually into the non-material does not 
prevent it from being convenient to have a separate de- 
partment of science for the study of wealth . -14* 


Isolated Man and for Society . • i9-39 

No man actually lives in isolation, but we can well begin 
by asking what would be the conditions of wealth to such 
a man. His wealth would depend upon :— 

(1) The magnitude of his original natural powers in 
proportion to his physical requirements . • 20-21 

(2) The degree in which he had improved his powers 
and his outward surroundings. 

I le could improve his original powers both by mere 
practice and by deliberate self-training and research ; 
he could improve his surroundings both by "good 
cultivation " and other beneficial alterations of the 
• earih's surface, and by the making of useful tools, 
buildings, &c. We cannot add up all such improve- 
ments into a total susceptible of exact measurement 
by any known standard, and we must recognize that 
the utility of actual changes, reasonably regarded as 
improvements when made, might disappear owing 
to alterations in knowledge and other circum- 

. • 214- 







(3) The goodness of the judgment with which he used 
his powers and surroundings. 

Labour as a whole is not an evil, but it is desirable 
to minimise the amount expended in the attainment 
of any particular end. There are differences in the 
agreeableness of different kinds of labour, and every 
kind becomes disagreeable when carried on too long. 
Conse{}uently, in distributing his powers and using 
his surroundings the Isolated Man would have to be 
guided not only by the urgency of his desires for 
different goods and the time to be spent in procuring 
them, but also by the kind of labour involved. He 
would also have to compare immediate with distant 
advantage, and decide how much of the one should 
be forgone for the sake of the other . . 24-30 

(4) The extent to which he saw fit to sacrifice some 
possible wealth for some non-economic end which he 
regarded as more important 

These conditions of the wealth of Isolated Man exist also 
in regard to Society, which will be better or worse off 
according as*: — 

(li Its members have great or small natural powers in 
proportion to their physical requirements 

(2)- Much or little improvement (measured by the 
standard of present utility) has been made in personal 
qualities, accumulated knowledge, and material 
surroundings ..... 

(3) Effort is more or less properly distributed between 
different ends, both present and future, and any irk- 
someness of effort is more or less properly weighed 
against results .... 

(4) Much or little wealth is deliberately sacrificed for the 
sake of non-economic satisfactions regarded as more 
important .... 

But Society will also be better or worse off according as .• — 

(5) The age-composition of the population is more or 
less favourable to productive effort 

(6) Greater or less advantage is taken of co-operation .* 

(7) Population is more or less near the most suitable 












11 l>i 

Co-operation, or Combination and Division 

OF Labour . . • • • 40-51 

" Simple Co-operation " is said to take place when several 
persons combine to do some one thing which could not be done 
at all, or could not be done quickly enough, by each separately 40 

"Complex Co-operation," usually called "Division of 
Labour," takes place when several persons unite to produce 
some result by each doing some different kind of work. It 
has several advantages:— 

(i) It enables the different qualities of different parts of 
the world to be brought into useful conjunction. Some 
things can be procured only from particular spots, and 
many can be obtained by spreading their production 
unequally, so that the people of one area produce more 
of the particular product than they consume, and the 
people of other areas less . • • • 4^-44 

The best distribution is that which enables all the 
things required, taken as a whole, to be produced 
easiest. The practical question is always what .changes 
are desiraV)le . • • • . • 44 / 

(2) It enables the different natural qualities of individuals 

to be fully utilised . • • • • 47" 

(3) It enables greater skill and dexterity to be acquired 

for each occupation . . • • • 40-5° 

(4) It facilitates the acquisition and retention of the sum 
of knowledge which is handed down from one genera- 
tion to another by means of books and oral teaching 50-51 

(5) It economises tools and machinery by keeping them 

in more constant use . . • • • S^ 





In the absence of co-operation, larger population, 
which means less land per head, would be inimical to 
wealth. But the greater the number of people the greater 
the advantage which can be drawn from co-operation. 




Hence the disadvantage of less land per head may be more 
than counterbalanced by the greater advantage drawn 
from co-operation ..... 52-3 

A dispute about the population of the ancient world 
directed attention to the progressive rapidity with which 
the population would grow if restrained by nothing more 
than lack of human fecundity. This led Wallace to argue 
that no Utopia was possible, since it would be over- 
crowded ...... 54-7 

Malthus said that there must always be a difficulty in 
providing subsistence, because population could, so far 
as the reproductive faculties of mankind alone are con- 
cerned, double itself every twenty-five years, while the 
annwal supply of subsistence could not be made to increase 
more rapidly than by an equal amount every twenty-five 
years. He did not explain why a larger population should 
not be able to produce as much per head as a smaller one 57-60 

His omission was supplied by the *' law of diminish- 
ing returns " which, though anticipated by Turgot, first 
came to light during the controversy about protection to 
agriculture in 181 3-15. In its crudest form this "law" 
asserted that increase of population caused an actual 
diminution of returns in agriculture by necessitating the 
extension of cultivation to inferior lands, and the adoption 
of more intensive and less productive methods on lands 
already in cultivation ..... 60-64 

In its more scientific form the law only asserted a ten- 
dency to this result, and admitted that the tendency 
might be defeated for a time by " improvements." This 
was thought enough to show that increase of population 
must be a bad thing, since it was assumed that in its 
absence "improvements" would increase produce per 
head. But we cannot tell what improvements would have 
been made if population had taken some other course 
from that which it has taken. There is, too, no ground 
for assuming that if returns to agriculture have diminished, 
the returns to all kinds of industry, including agriculture, 
must have diminished, nor consequently for assuming 
that everything which tends to diminish returns in agri- 





culture must tend to diminish them in all industries taken 

, . • 64-7 

together • • • * 

In manufacture as in agriculture a large aggregate pro- 
duction has its advantages and its <iisadvantages. In each 
of them taken separately, and in both taken together, 
there is a point at which it can be said that the produc- 
tiveness of labour is greater than it would be if the aggre- 
gate production were either greater or less than it is. h torn 
this it follows that there is at every given time a particular 
population which is neither too small nor too great. A 
departure from this point either upwards or downwards 
is unf^ivourable to the productiveness of labour. The 
position of the point is, however, perpetually being ^ 
altered by changes of circumstances . • - ^7 70 

The law of diminishing returns should be so expressed 
as to be universally true • • • ' ^o-?! 


The Social Ordkk . • • • • 72-95 

In order to obtain wealth it is necessary for Society to 
be well organised ; our existing condition is far from 
chaos, though it is also far from perfection. The present 
organisation depends on various institutions . 

The Family inures young persons to labour, and for 
the most part determines their allocation between the 
various employments, and its economic solidarity affects 

population . • • * * * 

Property in movable objects and dwelling-places arose 
out of the dislike of being ousted from the possession of 
anything. Property in land is of later origin, and at first 
is indistinguishable from territorial sovereignty • 7» »2 

The effect of the institution of property is to prevent 
many destructive actions, and also to make it the 
interest of various persons to perform productive opera- 
tions. It also obliges people to co-operate, and facilitates 
co-operation by enabling it to rest upon innumerable 
separate agreements between individuals. It enables world- 
wide co-operation to take place, although there is no ^^^^ 
world-wide authority . • • * * 





States were at first representative of groups of persons, 
but have become territorial. They sometimes fight, and 
even in peace they often carry out anti-social policies in 
regard to each other, but on the whole their general policy 
may be said to be one of co-operation . . . B6-9 

Inside its own limits each is an important factor in 
economic organisation. Laisser faire never was nor 
could have been practised . . . • 89-91 

The State arranges for means of communication and 
many other services . . . • • 9i~5 

The Controlling Power of Demand 

. 96-119 

Under the influence of existing institutions people work 
and allow their property to be used, not to satisfy their 
own wants directly, but to get money . . 9^-99 

Some sell objects or "commodities" and some sell 
services direct to the consumer ; others lend land, money, 
or other objects for money-payments. Intermediaries 
have placed themselves between workers and owners on 
the one side and consumers on the other side, and call 
the gains made by their occupation " profits," generally 
calculating these profits as a percentage on their "capital." 
This has led to the present organisation being called 
" capitalistic," but the intermediaries have no real control 
over what is produced, their action, like that of others, 
being controlled by demand .... 99-105 

Value and utility used to be contrasted, but there is a 
close connection between them in the fact that the amount 
which a person will give for a small addition to the amount 
of a commodity supplied to him, varies with the utility of 
that addition to him . . . . • 106-II 

Therefore, so far as a single person, a number of persons 
with equal wants and means, or a number between whom 
means are distributed in proportion to wants are con- 
cerned, wants may be said to control production ; but 
where a number of persons with different means which do 





not correspond with their diflferent wants are «>^^e>-";d; 

we can only say that production is controlled by demand 1 1 1-14 

Demand postulates ability to pay as well as want. The 
demand for different things is of different -elasticity, 
and it is according to this elasticity that the price of any- 
thing rises and falls, much or little, with variations in the 
quantity of it offered for sale, thus offering stronger or 
weaker inducements to further production . • II4-I9 


Society has no means for consciously deciding how much 
provision to make for the future. The actual provision is 
chiefly made in response to the demand for certain goods 
which comes from " saving.- A small amount of saving is 
caused simply by the desire to be able to spend the amount 

saved at a later date . • ' . . j k„ 

In modern conditions the greater part of savmg is caused by 
the desire to secure interest. The stimulation afforded to 
saving by a given rate of interest differs with— 

(1) The strength of desire to improve the future . 125-29 

(2) The ability to save . • • • -129-3 

Given a certain desire and ability to save, the 
amount of saving is controlled by the rate of 

• no-31 
interest . • • ' , ' r 

If all other changes were excluded, the rate ol 
interest would fall simply as more and more savmgs 
were accumulated, and the degree of the fall would 
depend on the magnitude of the field for the employ- 
ment of savings at each different rate . -131-34 

But increase in the number of people is a counter- 
acting force, and invention and discoveries are con- 
tinually altering the relative advantages of the 
methods which require, and the methods which do 
not require saving, so that they sometimes tend to 
lower and sometimes to raise the rate of interest . 134-36 
Inequality of means between individuals forms an obstacle 
to correspondence between the aggregate amount saved and 




the amount which would be saved by a society exercising 
perfect judgment ...... i3o-37 

Saving does not constitute the whole of the provision made 
for the future, as it can only be applied to things capable of 
being property . . • • • .138 

CONTINUOUS Power to Demand, or Income 139-62 

Income is the great source of power to demand. It is 
conceived as the money coming in to the receiver, but 
we add the money value of receipts in kind when they 
can be easily valued . . . • • i39~43 

We do not include the proceeds of undisguised robbery, 
nor inheritances and gifts .... 144-47 

Income from ownership of property consists of regular 
receipts after deduction of necessary expenses, and these 
expenses are ordinarily taken to include all that is neces- 
sary to keep the property unimpaired . . . 147"^^ 

It is difficult to calculate how much is required for this, 
and in fact the principle is not much applied to mines or 
to life-annuities . ..... 148-53 

Income from labour is reckoned after deduction of 
necessary continuing expenses, but without deduction for 
preliminary expenses of training, etc. . • I53~56 

The income of many institutions may be added to the 
income of individuals to form a total or aggregate income, 
but it is better not to attempt to add something con- 
ceived to be the income of States and their territorial 
subdivisions ....•• 156-00 

Persons with property can for a time exert a power of 
demand in excess of that given by their income, if they 
choose to part with their property and spend the pro- 
ceeds, but the total so spent is not very large. The 
power to demand given by income is often transferred by 
means of gifts and allowances, but it may then be re- 
garded as exercised by deputy. Subject to these modifi- 
cations, the power to demand is distributed approximately 
in proportion to income. .... 160-62 


coNTEX rs 

The Classification of Incomes . 

. 163-72 

The eighteenth-century English classification of in- 
comes into wages, profits, and rent was appropriate to 
the time and place. Adam Smith endeavoured to give 
precision to it by identifying wages with income derived 
from labour, profits with income derived from capital, 
and rent with income derived from land . . 163-9 

He and his successors shirked the difficulty arising 
from the fact that his " undertaker " gels his profits both 
from labour and from capital, but in recent years the 
classification has been made fourfold instead of threefold 
by the division of the old " profits " into " interest" of 
the capitalist and earnings of the entrepreneur, while the 
distinction between interest (in the new sense) and rent 
has been made much less marked by Marshall's concep- 
tion of '* quasi-rent " . . . .'...• ^^9-71 

The way is now open for a twofold division into 
income derived from property and income derived from 
labour . . • • • • .171-2 


The Division of Income i;etween Owners and 

Workers . . . • • 173-81 

An inquiry into the division of income is only an 
inquiry into the relative magnitude of different incomes 
or classes of income . . . . • 173-4 

That the average owner should be in receipt of a 
higher income in proportion to that of the average worker 
is not a necessary result of property as a whole receiving 
a larger proportion of the aggregate income . • 174-5 

The problem is one of aggregate, not of unit, values, 
so that changes in total quantity have to be taken into 
account as well as changes in the value of units. The 
effect of relative changes in the supply of the two things 




depends on the elasticities of the demand for them. 
Changes in the elasticities of demand may arise from in- 
crease or decrease of income, mutation of fashion or 
taste, and from inventions and discoveries . . 175-9 

In the past it is probable that property's share has 
increased relatively to that of labour . . . 180-81 


Incomes from Ownership of Property. 


The first and by far the most powerful cause of in- 
equality of incomes derived from property is the fact that 
persons receive unequal amounts by bequest and inherit- 
ance. Law and custom sometimes encourage and some- 
times discourage dispersion of property on the death of 
its owner ...... 182-5 

The second cause of the inequality of property is in- 
equality of savings, chiefly due to the inequality of in- 
comes from which the savings have to be made, and 
partly to the varying magnitude of the claims of depen- 
dents ....... 185-7 

The third cause is the fortuitous alterations which take 
place in the value of property once acquired . . 187 


Incomes from Work 


Difllerence in income received from work is not all a 
question of value, since the quantity of work done is a factor. 
The quantity varies from individual to individual with industry 
and ability ....... 188-9 

The income derived from different occupations by persons 
of average industry and ability working at them depends on 
the value of the work done. Labour does not create value. 
We might expect competition to arrange the comparative 
number of persons in the various occupations so that the 


' ! 




outputs would be of the precise value which would yield 
the same remuneration for the average person in every 
different occupation ....•• 189-91 
But we could see that — 

(1) There would always be deviations from this level, 
some of which might be of long duration . . 19^-3 

(2) Occupations offering large prizes to persons of excep- 
tional success would yield less than the others to the 
average person . . . . • I93~5 

(3) Disagreeable occupations would be better paid than 
agreeable ones . . • . "195 

(4) Irregular employments would be better paid for the 
periods during which work is actually carried on, and 
also, if uncertainty was a deterrent, on the whole . I95~^ 

(5) Occupations for which expensive training or long 
postponement of earnings is necessary would bring in 
higher incomes during working life . . . 196 7 

If this were a true picture, we could say that not 
the earnings but the whole advantageousness of all 
occupations was equal. But it is not a true picture, 
because even if proper sums for original cost of train- 
ing, etc., are deducted from earnings, a large balance 
of advantageousness remains in favour of the trades 
which require expensive training and long postpone- 
ment of earnings. This comes about because the 
rearing of children is not a matter of business, but 
is left to the family, charity, the Church, and the 
State. ..... .197-201 

Hence differences in earnings from labour are much 
more largely hereditary than they would be if they de- 
pended only upon the inheritance of natural qualities 202 

There is considerable difference in the remuneration 
of the two sexes owing to their having different 
qualities and the field for employment of women being 
for various reasons smaller than that for the employ- 
ment of men ...... 202 -7 

Heredity and sex are the two greatest causes of in- 
equality of income ..... 207-8 





The Relation between Individual Income 

AND Individual Wealth . . . 209-23 

We often accept income as a rough standard of the wealth 
of " independent " persons living at the same time and place. 


(i) Income does not cover all material benefits, some 
being received in consequence of the income-receiver 
doing work for himself and using his own property . 209-10 

(2) Income is not all devoted to the benefit of its receiver, 
as he generally spends a portion of it in satisfying 
family or other "claims" upon him and another por- 
tion in promoting non-economic ends . . 2IO-I2 

(3) Income for any period includes saving during that 
period, and savings do not directly satisfy wants like 
spendings, so that wealth for the period is measured 

by the spendings rather than by the whole income . 212-13 
^) Different persons having different wants, a given in- 
come may go much farther in promoting one person's 
wealth than it goes in promoting another's . . 214-15 

(5) Different persons having different capacity for manag- 
ing income, one person will " get more out of " a given 
income than another . • . . . 215-16 

(6) Incomes are obtained under very different condi- 
tions ....••• 216-17 

(7) The utility of additional income diminishes as the 
income grows . . . • • 2 1 7-20 

Probably on the whole, the seven facts together 
somewhat alleviate inequality, owing chiefly to the 
very powerful influence of the seventh . . 220-21 

For comparisons of the wealth of persons or groups 
of persons living at different times or under different 
conditions of climate, etc., at the same time, income is . 
a less useful measure than for comparisons of the 
wealth of individuals and groups living at the same 
time and place, and it is less and less useful as the 
times are more distant and the places more unlike . 221-23 

XXI 1 







The Wealth of Nations .... 224-74 

The weallh of a nation was at one time regarded as its 
aggregate riches : modern discussion assumes that it is 
greater or less accortlingasthe average or typical member 
of the nation has more or less. It takes the meml.)ers of 
the nation to be the inhabitants of an area, and the area 
discussed is usually a customs area, not necessarily the 
territory of a sovereign State, but this is accidental 
rather than fundamental .... 224-28 

It was long commonly thought that the great thing 
necessary for national wealth was the acquisition and 
retention of a stock of bullion, and that proper regula- 
tions were necessary to secure this end. The earliest 
plan was to make laws allowing l)ullion to come into 
the country, but forbidding its being carried out. Later 
it was argued that all that was wanted for the acquisi- 
tion and retention of bullion was a " favourable balance 
of trade " . . . . . . 228-29 

This was true subject to proper allowances being made 
for (i) ct>st of carriage, (2) payments for other services, 
(3) payments for the use of property, (4) investments, 
and (5) various non-commercial payments . . 229-35 

If e.xact figures had been available for imports and 
exports, and also for the necessary allowances, fears 
would have been removed in most countries. As no such 
figures were available, each nation thought itself in 
danger of losing its money unless it made proper regula- 
tions encouraging exports and di.scou raging imports . 236-37 

When eventually these regulations were seen to be 
perfectly futile for the purpose for which they were in- 
tended, a great system of prohibitions, duties, and 
bounties had grown up, and the doctrine of " protection" 
was invented in the interest of the parties who would be 
hurt by the abandonment of the system . . 237 

Popular support of Protection arises chiefly from the 
belief that it gives employment, but this belief is 
founded on fallacious reasoning . . . 23S-42 

More enlightened protectionists argue that Protection 
will cause a better selection of industries by the protected 
country, which is unlikely .... 242-47 

Protection is sometimes supported on the ground that 
it enables a country to tax people living outside it : this 
is sometimes possil)le, but seldom worth doing . . 247-53 

The effects of fiscal policy are not likely to appear in 
the form of perceptible difterences in the condition of 
the working-classes of different countries . "253-55 

To discover the causes of differences in the wealth of 
nations we should begin by considering the differences 
in the wealth of small groups inhabiting very small 
areas ....... 255-57 

Then in the wealth of larger groups, such as the inhabi- 
tants of English counties .... 257-66 
Applying what is thus learnt to nations, we find that the 
comparative wealth of nations depends upon — 

(i) The natural and acquired qualities of the people . 266-69 

(2) Their occupations ..... 269-71 

(3) The value of the property which they own inside and 
outside their country . .... 271-72 

(4) The degree in which their country is " new '' . 272-74 





There is no reason for not accepting the time- 
honoured identification of the subject-matter 
of economics with " wealth." At any rate, I 
intend to accept it in the present work, and 
consequently I shall treat the question " What 
is wealth?" as exactly the same question as 
" What is it most convenient to take as the 
subject-matter of economics?" Most con- 
venient, I say, because economics is a depart- 
ment of science, and therefore the question 
what should be included in it is a question of 
the most convenient delimitation of the different 
departments of science. 

To such a question the practice of writers 
and oral teachers usually furnishes a better 
answer than their preliminary search for a 
definition which they hope will fit the matter 
of their investigations. I proceed, therefore, 
to ask what is, in fact, the usual subject-matter 
of books and lectures on economics. 

It is, in the first place, undoubtedly some- 
thing possessed or enjoyed by human beings. 




!>l I 

It is true that when economics fi«t began to 

stand out as a separate Jep^^[ m'" nto comro - 
the economists stepped straight into contm 

Xt^ier they had to do with any other body 
Than -the nation/' So when Steuart, ^^^^7^7^^ 
caUed his Trge work An Inquiry ^nto the 
Principles of Political ffroA/omv, the term 
- poffi "indicated that he intended to discuss 
naCnal wealth, . Adam Smith ten years ate^ 
probably imagmmg himself ^^o ,^e precmaea 
from eivine his book the same title as bteuart s 
used A^Unqmry into the Nature and Cause\o^ 
The Wealth of Nations as synonymous. In the 
^m'ore^genera/parts of his ^^^^^^j;^-^^ 

Sn-^tdTis cle'ar t^aTTe intended his 
work to cover more than a literal mterpretation 
rthetitl7 would include. I-ter writers ha^e 
often used the word " community in the san^e 
wav as Adam Smith used society, and haxe 

^v.n nf "the wealth of the community 
Xe'n Vy mafs^dTnto one body all the human 
beings with whom they were dealing 

AU economists have considered the wealth 
of classes and individuals within tlie community 
as well a that of the whole community so 
fhat it may be said that neither the use of the 
that 1^.^'^. p, ■ "political economy' nor 

ruse'o 1^^^^^^^^ a- ^\b^ '^^^^ 

as intended to confine the science to the wealth 
nf nations The subject-matter of political 
:Lnomy or economics has always been the 
wealth of human beings generally. ^^.•. 

Originally '* wealth " in ordinary English 
wa? the name of a state or condition of human 


beings such as is suggested by the prayer for 
the King in the Book of Common Prayer, 
" Grant him in health and wealth long to live." 
The suffix th indicates a state or condition, so 
that *' wealth " indicated the state or condition 
of being well, or as we should say in modern 
PInglish, prosperous, just as " health " indicated 
the state of being healed or free from disease. 
But in course of time the word came to be 
applied to money and other concrete things, 
command over which made a person live in 
wealth. In the eighteenth century some 
writers found it necessary to protest against the 
view that national policy should be directed 
towards the aim of securing a perpetual 
increase of the gold and silver within the 
national territory. In doing so they very 
naturally said that wealth did not consist 
entirely of gold and silver, but also of certain 
other concrete things, such as horses and cattle^ 
houses and orchards. This led them to lose 
sight of the older meaning of wealth as a 
state or condition of human beings, and to 
regard it rather as certain material possessions 
of human beings. 

Most of the statements which an economist 
is likely to make relate to quantities : he deals 
with increases and decreases. It is impossible 
to make statements about increases and 
decreases of the wealth of human beings if 
their wealth is supposed to consist merely of 
certain concrete objects without reference to 
time. Propositions about increases of tables, 
chairs, or loaves, which at first sight appear 
intelligible enough, are as meaningless as pro- 
positions about the increase of raindrops with- 
out reference to time would at once appear to 


us It is quite true that we do not usually, 
find bare statements that tables, chairs or 
loaves have increased unintelligible, but that s 
because from the context or by some other 
means we have gathered that the statemen 
refers to these things, not m the abstrac but 
in some definite relation to time. We arc led to 
think of the tables and chairs in the world or 
some part of the world at some one instant 
of time or of the loaves produced in the 
world or some part of it in some particular 
length of time, such as a week or a year. 

But till quite lately the searchers for a formal 
definition of *' wealth " overlooked this point, 
and great confusion resulted from the over- 
sight The more primitive the economy of a 
people, the more likely are they to have regard 
to their possessions at a pomt of time rather 
than to what they can expect to receive as 
time passes. The poorer a person is the more 
likely is he to think of what he has at the 
moment and the less of his receipts in the 
past or his prospect of receipts in the future. 
The question " How much a year have you? 
or even "How much a week?" is not one 
which occurs to primitive man or even a 
the present time to a man of the lowes 
class or to a child of any class in the most 
" advanced " countries. To them the qucsUon 
is " How much have you got? Hence it is 
not surprising that the collection of objects 
which a^man^f the seventeenth or eighteenth 
«mury would usually have in his mind when 
he talked of increases or decreases of wealth 
would be the collection of things in existence 
Tt a noint of time rather than the amount 
coming in or being created per annum or per 



diem. Nor is it surprising that in cultivated 
society the conception of a periodical receipt 
should have subsequently forced its way in and 
overpowered the conception of a realized 

It is, however, perhaps rather surprising that 
the transition from one idea to the other should 
have taken place without economists noticing 
the change. An explanation which is at least 
plausible may be given. Adam Smith greatly 
facilitated the transition by first calling his 
book An Inquiry into the Nature and Causes 
of the Wealth of Nations, and then deliberately 
defining the wealth of a nation as its " annual 
produce," or " the necessaries or conveniencies 
of life which it annually consumes." But he 
did not notice the difference between the wealth 
of a nation defined in this way and the con- 
ception of it as a number of things possessed 
at a point of time, because he was engrossed 
with the desire to protest against the cruder 
conception of it as the amount of gold and 
silver possessed. Thus instead of saying that 
the wealth of a nation is not the land^ cattle, 
machinery, and other things possessed by it at 
a point of time, but rather the annual produce 
of the land and labour of the people, he says 
it is not gold and silver^ but the annual produce. 
Later writers for a long time followed him 
in making the same antithesis, and were thus 
led, like him, into overlooking the really 
important part of the change which was being 

Whatever the explanation may be, there is 
no doubt of the fact that economists did fail 
to indicate clearly in their definitions of wealth 
whether the wealth of persons and peoples, 


which alone could be meant when quantitative 
statements were made about " wealth," was the 
collection of things possessed by them at a 
point of time or the collection produced by 
them, or somehow obtained by them, within a 
length of time. But in their practice they 
usually followed Adam Smith. Dealing, like 
him with the " production " and " distribu- 
tion " of wealth, they were obliged to keep 
length of time in their minds : the production 
of wealth was greater or less according as 
more or less was produced per annum, and the 
distribution of wealth, as he and they conceived 
it was the distribution of the annual produce. 
Thus, in spite of the absence of definitions 
indicating the fact, the " wealth " with which 
economists generally intended to deal when they 
made quantitative statements concerning it was 
the wealth periodically produced or coming in, 
and we can now proceed to inquire of what 
this was supposed to consist. 

The English statisticians of the latter part 
of the seventeenth century regarded the annual 
produce of the country with the eyes of a 
farmer. They thought of the raw produce of a 
farm, and regarded this as forming the sub- 
sistence of the whole of the people. The 
French ecotwmistes, or physiocrats, the 
followers of Quesnay, had the same agri- 
cultural standpoint, and made the doctrine more 
definite by expressly denying the quality ot 
productivity to all labour not employed im- 
mediately on the land. Adam Smith made a 
change in the right direction by including in 
" productive " labour not only the labour 
employed immediately on the land, but also all 
other labour which improved material objects, 


and thus, as he said, did not perish in the very 
instant of its performance. Probably he would 
not have halted here if it had not happened 
that he mixed up the question of productive 
and unproductive labour with an inquiry into 
the accumulation of capital, and was thus 
insensibly led to ask himself what labour 
produces capital instead of what labour pro- 
duces ''produce." J. B. Say saw the weak- 
ness of his position, and extended the notion 
of productive labour to cover " non -material 
products." From his time, in spite of J. S. 
Mill, who here, as often, tried to furbish up the 
obsolete, the annual produce was generally 
regarded as consisting of " services " as well 
as " commodities." 

The annual produce was sometimes for 
greater accuracy called the " net produce," 
because it was seen that care must be taken 
to avoid double or triple reckoning of the 
same thing, which would occur if, for example, 
iron ore, pig iron, and iron pokers were all 
added together. The annual produce, or more 
precisely, the annual net produce, consequendy 
came to be regarded as consisting only of 
those commodities and services which actually 
reach the consumer, plus those commodities 
which were added to the existing stock of 
commodities and minus those which were 
deducted from the existing stock. The con- 
sumer here was of course the final consumer, 
who consumes for his own satisfaction and not 
in order to secure some further result ; for 
example, the consumer of wheat was the person 
who ate it in whatever form, not the miller or 
the baker. 

Now there are no means by which we can 

8 iHE sub]p:ct-matter of economics 

actually distinguish net produce from gross pro- 
duce in this way if we approach the subject 
from the side of the producer. A few commo- 
dities, such as loaves of bread, may be sup- 
posed without material inaccuracy to belong 
entirely to net produce. But many commodities 
are used both for immediate satisfaction and 
for further production, and there is no way, 
from the producer's side, of distinguishing 
which parts are used in one way and which in 
the other. For example, of lubricating oil, 
the quantity used in a cotton-spinning factory 
will be a means towards the _production of 
another commodity, cotton cloth : the quantity 
used in running a motor-car for pleasure will 
fall into net produce. Again, gas is sent out 
from the same gasworks to persons who use 
some of their supply for driving a gas-engine 
to make something which they sell, and some 
to light their own dinner table. Another 
great difficulty arises from the fact that 
when the stock of existing things which 
are used by man is, as continually happens, 
depleted by the subtraction of some things and 
increased by the accession of other things, 
there is no way of marking out the gross 
additions into two parts, the net additions and 
the remainder. Suppose the stock of ships is 
diminished by the sinking or breaking up of 
three hundred small sailing ships and increased 
by the addition of fifty large steamers : it 
would be misleading to say simply that the 
number of ships was reduced by two hundred 
and fifty, while on the other hand, any calcula- 
tion as to the relative carrying capacity of 
sailing ships and steamers and a consequent 
reduction of the two to some common measure 


involves all sorts of assumptions and 

A perception, not always very distinct, of 
these difficulties has gradually led to the 
substitution of " income " for " produce " or 
" net produce." One of Marshall's suggestions 
for the definition of economics at the beginning 
of the earlier editions of his great work was 
how man " gets his income, and how he uses 
it." Here we approach the subject from a 
different side. Instead of starting from the 
land and labour and trying to trace the product 
through its various stages, excluding double 
reckonings as we go, we look in the first place 
at the valuation of the net results which we get 
by considering individuals' money-incomes. 

But money -income does not always include 
everything which we should regard as belong- 
ing to the net produce. Nearly all farmers con- 
sume part of their own produce, most wives 
perform domestic duties of a kind which add 
to the material v/elfare of themselves and their 
families, and so on. Observing this, economists 
have been led to add to the actual money - 
income a money -valuation of all economic ser- 
vices and commodities which are not accounted 
for in the money -income. This plan encounters 
two difficulties. How are we to decide what is 
economic, and how are we to value ? Are the 
services of a mother to her child economic, and 
are they to be appraised at the same money - 
value as those of a wet-nurse? 

Supposing these difficulties to be surmounted, 
we find ourselves dealing with a sum of money 
supposed to represent the commodities and ser- 
vices of an economic character which are 
enjoyed, plus those commodities which form 



the net addition to the stock of useful things. 
But quantitative statements about this sum of 
money are not satisfying by themselves. If we 
say the income of the community has increased, 
we do not want to be met with the retort " The 
income valued in money may have gone up, 
but that is only due to a fall in the value of 
gold. The increased sum of money at which 
you value the income means no more and no 
better commodities and services than before.^' 
Consequently we are driven to " go behind " 
the valuation by inquiring into the purchasing 
power of money, and so the adoption of the 
money -estimate of income does not in the least 
relieve us from the necessity of considering 
the "real" income. The inquirer who has 
been told that income consists of commodities 
and services, and that it rises and falls with the 
quantity of those commodities and services, still 
wants to know how that quantity is to be 


Where commodities and services of different 
kinds are concerned, there is clearly no possi- 
bility of comparing the quantities intelligibly 
by weight, bulk, or number. We might say 
that a collection of things consisting of one 
loaf of bread, one pound of beef, one pmt 
of beer, and one railway ticket is equal to 
half, of a collection of things consisting of two 
similar loaves of bread, two similar pounds of 
beef, two similar pints of beer, and two similar 
railway tickets. But we cannot make any state- 
ment about the relative quantities included in 
two collections one of which consists, as before, 
of one loaf, one pound of beef, one pint of 
beer, and one railway ticket, and the other 
collection of three loaves, half a pound of beef, 



and two railway tickets. At first sight of the 
problem we may think we can, but a moment's 
reflection makes us see that the comparison we 
then have in our minds is one of values, not of 

If we drop quantities and compare values, we 
are satisfied so long as no doubt is raised as to 
the invariability of our standard. At the same 
time and place our standard will always " mean 
the same thing " in regard to the two 
collections of commodities and services we are 
considering, but as soon as the places differ, 
and still more as soon as the times differ, we 
begin to question whether the measure of value 
means the same thing at the two places or 
times. We then invariably find that it does 
not. Whatever standard be taken, at the one 
place or time some commodities or services 
will be worth more of it, and others less, than 
at the other place or time : it will even often 
happen that some commodities or services 
which are worth httle of it at one place or time 
are wholly unprocurable by the offer of any 
quantity of it at the other place or time. 

Eventually we find ourselves groping after 
a measure of the good effect of the commodi- 
ties and services upon the persons who get 
them ; we find we really want to know whether 
a person or body of persons with such and 
such an " income " in pounds sterling (or con- 
sisting of such and such commodities and 
services) is what we usually call as " well off " 
as another person or body of persons with such 
and such other income in pounds sterling (or 
consisting of such and such other commodities 
and services) at some other place or time. 

Moreover, recent economic analysis has 



drawn attention to the fact that even where 
quantity can be measured by weight or bulk, 
the effect of the enjoyment of these commodi- 
ties on the persons who enjoy them cannot be 
regarded as proportionate to the quantity. Six 
loaves of bread consumed per day, it is pointed 
out, will not make a man six times better off 
than one per day. Even £6,000 a year to be 
spent as he pleases will not make a man six 
times as well off as if he had only £1,000 a 
year. With £6,000 a year he will not consume 
six loaves instead of one : by introducing 
variety he can retard the fall of utility, but he 
cannot altogether prevent it. With the larger 
income he must spend some of his pounds 
sterling on more trivial satisfactions than would 
be obtained by the least important pounds 
spent out of the £1,000 a year. 

In the last forty years it has consequently 
been the practice of economic teachers to deal 
more and more with the ultimate results of the 
possession, use, and consumption of commodi- 
ties and services, regarding these commodities 
and services as the means to an end rather 
than an end in themselves. So, instead of 
having our attention directed entirely to out- 
ward objects and particular actions, we find 
ourselves considering " utility " or " satis- 
faction." Nor is this all. The democratization 
of literature and political science which has 
taken place since the earlier part of the 
eighteenth century has led to the practice of 
bringing into account the pain and irksorne toil 
involved in the creation of positive utility or 
satisfaction. Most economic writers before 
Adam Smith, and some after him, regarded the 
interests of the " nation " in some way which 



enabled them to exclude the interests of the 
" working classes," as we call them. Most of 
the pain and irksome toil of production fall on 
this portion of the people, skd that exclusion of 
the working classes from the nation led to a 
neglect of all consideration of the pain and 
irksome toil involved in procuring " wealth " 
for the nation. Whether the working classes 
should labour for ten hours or for sixteen 
was a question to be determined solely by 
discovering which number of hours produced 
the greater amount of commodities. The idea 
of deliberately sacrificing positive utility or 
satisfaction in order to have greater leisure was 
scarcely thought of. If he advocated it at all, 
an economist would regard himself as 
deliberately suggesting an economic sacrifice 
in order to secure a non-economic but greater 
good. Most recent economists would unhesita- 
tingly reject this view, and regard the economic 
condition of a people who had a certain amount 
of positive satisfactions and worked ten hours 
a day as superior to that of a people who had 
the same satisfactions of a positive kind but 
worked sixteen hours to obtain them. 

Thus the subject-matter of economics has 
become utility or satisfaction minus disutility 
or dissatisfaction, so that if we retain " wealth " 
as its compendious description, we must take 
" wealth " as having reverted to its old meaning 
of a particular state or condition of human 

What that state or condition exactly is, how- 
ever, it is not very easy to say. It is com- 
pounded of satisfactions and dissatisfactions, 
but these are by no means exclusively 
economic : there are plenty of them which no 

( ; I 


one in his senses and with any regard to the 
ordinary usages of language would call eco- 
nomic, and which no one with any regard to 
the convenient delimitation of sciences would 
attempt to treat in a work on economics. 

Till recently most economists, if asked to 
distinguish between satisfactions of an economic 
and uneconomic character, would have said that 
the economic could be bought and sold, and 
also said or implied that the non-economic 
could not be bought and sold. There are, 
however, several difficulties to be overcome 
before this can be accepted as furnishing a 
criterion for distinguishing what is actually 
treated in economic works from what is not. 
On the one hand, it seems to exclude from 
economics many things which are -'actually 
included by every economist, or would be 
included by him if he happened to come 
across them. That the satisfaction which some 
hundreds of thousands of people enjoy every 
week from the use of Hyde Park is an economic 
one no economist would think of denying, but 
it seems impossible to describe that satisfaction 
as even potentially exchangeable or subject to 
purchase and sale. Again, if it were discovered 
that Mars was inhabited by people like us, and 
that the Martians found satisfaction in food, 
clothes, and shelter just as we do, no economist 
would be prevented from comparing the eco- 
nomic condition of the xMartians with our own 
by the further discovery that the Martians had 
not established a system of private property 
nor practised exchange. Yet in that case could 
it reasonably be said that the satisfactions of 
being fed, clothed, and sheltered were saleable 
in Mars? And if not, would the fact of similar 



things being saleable on the earth be sufficient 
to justify us in regarding them as ** potentially 
saleable" in Mars? On the other hand, the 
criterion of buying and selling brings many 
things into economics which are not commonly 
treated there and which it does not seem con- 
venient to treat there. A large trade has 
existed since (and no doubt before) history 
began in supplying certain satisfactions of a 
sensual character which are never regarded as 
economic goods. Indulgences to commit what 
would otherwise be regarded as offences against 
religion or morality have been sold, sometimes 
openly and almost at all times under some 
thin disguise : nobody has regarded these as 
economic goods. 

The economists who have distinguished the 
sphere of economics by the aid of this test seem 
after all to have treated of just the same sub- 
jects as are described as economic in the every- 
day conversation of educated people. In such 
conversation the term has no necessary refer- 
ence to buying and selling, nor to the 
potentiality of being bought and sold. We 
talk of " economic questions," " economic 
interests," and " the economic point of view." 
We separate economic questions from religious 
questions, from literary questions, from histori- 
cal questions, and from hundreds of other ques- 
tions. We inquire whether in some particular 
case the economic interests of some persons 
are opposed to their political or their religious 
interests. We regard some things as desirable 
from an economic point of view which for 
some non-economic reasons we reject as on the 
whole undesirable. 

In these and similar phrases the term 



economic conveys to our mind an impression 
about which we have so Uttle doubt that we 
find it difficult to define in the same way and 
for the same reason as we find it difficult to 
explain what we mean by the terms " blue " 
or "red." Confronted suddenly by the word 
"blue," a weather optimist thinks of the sky j 
some of us think of the block marked " blue " 
in the box of paints with which we dabbled 
when we were children ; others of our first or 
last blue frock. Confronted by the word 
" economic," one man may think first of coins, 
another of figures in bank-books, another of 
crops growing in the field and cattle browsing 
in the meadow, and another of the morning 
crowd going to its work in some great city. 
None of them will come at all creditably 
through a cross-examination on any definition 
which they may construct either on the spur of 
the moment or after considerable reflection. 
But if one example after another were put 
before them all, they would be found to agree, 
at any rate very nearly, as to what things were 
to be included and what excluded from the list 
of things economic. 

They would agree, for instance, that the 
question " Was Mahommed the Prophet of 
God?" was not an economic one, and that the 
prohibition of pork as human food was of 
economic interest. They would agree that 
"Did Bacon write Shakespeare?" was not an 
economic question, and that the satisfaction 
which believers in the cryptogram would feel 
if it were universally accepted that Bacon did 
write Shakespeare would not be an economic 
satisfaction, while on the other hand they would 
agree that the controversy would have an eco- 



nomic side if copyright were perpetual and 
the descendants of Shakespeare and Bacon were 
disputing the ownership of the plays. 

If their examination were continued, and 
more and more examples adduced, they would 
soon begin to say that there is no " hard and 
fast line " between economic and non -economic 
things, 'but that the one shades gradually into 
the other, as blue neckties shade into green, so 
that just as there are some ties which some 
persons call green while others call them blue, 
although every one is agreed that the sky (in 
fine weather) is blue and the grass green, so 
there are some things which some persons call 
economic and others non-economic, although 
every one is agreed that the satisfaction of 
hunger is economic and that the satisfaction 
which a Tibetan fanatic feels when he has 
himself immured for life in the dark is non- 

For ordinary purposes economic things can 
best be described as economic, just as blue 
things can best be described as blue. But if 
we must have a second-best description for 
the benefit of those who doubt whether they 
know what is meant by the term economic, I 
think we must fall back on " having to do 
with the more material side of human happi- 
ness," or more shortly, " having to do with 
material welfare." 

The exact phrase used does not really matter 
very much, since we must face, and face boldly, 
the fact that there is no precise line between 
economic and non-economic satisfactions, and 
therefore the province of economics cannot be 
marked out by a row of posts or a fence hke 
a political territory or a landed property. We 


can proceed from the undoubtedly economic 
at one end of the scale to the undoubtedly 
non-economic at the other end without tinding 
anywhere a fence to climb or a ditch to cross 
Beginning with the satisfaction of hunger and 
thirst as the most material, we can arrange 
other satisfactions roughly in order, till at last 
we arrive at the most purely non-material, sucn 
as that felt by a martyr dying of starvation 
rather than abjure his God. We shall never be 
able to say that 99 per cent, of such a martyr s 
welfare was non-material and due to religious 
fervour and the remaining i per cent, was 
material and due to the sustaining effects ot 
the food he ate a week before. We shall never 
be able to say of any man that 50 per cent ot 
his welfare came from food, clothing shelter, 
pictures, and concerts, 25 per cent from the 
love of his wife, 15 per cent, from his support 
of his Church, and 10 per cent, from his 
pride in his position as president of the local 
party caucus. But we can quite legitimately 
and usefully consider what will increase or 
diminish the more material side of his happi- 
ness or shortly, his material welfare or wealth, 
and 'it is quite convenient to have a separate 
department of science, called economics, to deal 
with the causes of the material welfare or wealth 
of human beings, considered both as a whole, 
and as individuals, and also in groups. 



Most of economics deals with man living in 
society, but it is best to begin with the simplest 
possible cases. I shall therefore disregard the 
sneers which have sometimes been directed by 
sciolists against " the Crusoe economy," and 
consider for a moment the conditions on which 
the material welfare or wealth of isolated man 

Our isolated Man must necessarily be some- 
what of an abstraction. Adam, as described 
in Genesis, was too much surrounded by super- 
natural influences to be a useful type for our 
purpose, and if we fell back on evolutionary 
theories, we should, I suppose, trace the human 
race back not to an isolated man, or even to 
an isolated pair — an Adam with an Eve — but 
to something more like a society of chim- 
panzees. Robinson Crusoe is not quite satis- 
factory, because he started on his career of 
isolation with a stock of knowledge acquired 
in societary existence, to say nothing of the 
important tools and other things which he saved 
from the wreck. Moreover, his efforts during 
his isolation were frequently directed towards a 
return to the societary existence from which he 











I ■» 1 

had accidentally become divorced, so that he 
did not always act as a completely isolated man 
would have done. In order to study profitably 
the conditions on which the material welfare ot 
Isolated Man really depend, we can best pro- 
ceed by imagining our Crusoe as having been 
always the sole human inhabitant of the globe, 
putting behind us any inquisitiveness as to how 
he got there and as to the probable duration 
of his life. We may also suppose that he 
has by some means or other become located in 
the most suitable situation for Isolated Maji. 
In these circumstances the wealth ot the 
Isolated Man will depend first on his original 
qualities, secondly on the extent to which he 
has improved his powers and his material 
surroundings in the past, thirdly on the 
iudgment which he exercises in the use ot his 
actual powers and surroundings, and fourthly on 
his dehberate choice between wealth and other 

welfare. , • i 

I The proposition that the original or 
natural qualities of the Man are one of the 
conditions on which his material welfare 
depends needs little elaboration. f strong in 
body and mind in proportion to his physical 
needs, he will obviously be able to satisfy those 
needs more easily and better. The only mis- 
take Hkely to be made is one which is not ot 
any very great practical importance, namely, the 
omission from consideration of the magnitude 
of physical needs. We are apt to regard the 
stronger man as the superior engine for the 
production of material welfare, without much 
thought for his greater requirements in the 
matter of food, clothing, and shelter But we 
cannot reasonably suppose that a large man 

1 1 

! t 

gets greater satisfaction from his large meal, 
his large suit of clothes, and his large bed than 
the smaller man gets from his smaller meal, 
clothes, and bed. The most favourable condi- 
tion, therefore, is not simply the greatest 
strength, but the greatest strength in proportion 
to physical requirements. 

2. When we start from any particular point 
of time and consider the material welfare of 
the man for the ensuing period, it is clear that 
much depends on what he has done in the past. 

{a) Unless he has abandoned himself to 
some sort of vice which has enfeebled him, he 
will almost necessarily have improved his 
powers. The frequent repetition of different 
forms of manual exertion will have made him 
more expert with his hands and body. He can 
scarcely live without observing, and can 
scarcely forget all that he observes, so that 
his knowledge can scarcely fail to increase, and 
this increase of knowledge means an increase 
of power to gain many, at any rate, of the 
ends which he is likely to put before himself. 
But over and above this merely incidental kind 
of improvement, the man may have deliberately 
set himself to improve his manual or mental 
dexterity and to increase his stock of useful 
knowledge. At one stage of his development, 
for example, he may have trained his mind to 
calculate distances and his hand to act on the 
knowledge by shooting at targets when no 
game presented itself, or he may have 
deliberately experimented with different kinds 
of ore with the intention of increasing his 
knowledge of metals and their properties. The 
longer he lives, then, the more expert and the 
more well-informed he is likely to become. 




(b) In addition to improving himself, our 
Isolated Man may also have improved his sur- 
roundings, that is to say, he may have made 
them more suitable for his own purposes. The 
outer crust of the earth itself may have had its 
qualities altered by him in such a way as to 
become either better or worse from his point 
of view. He may have cultivated the soil in 
such a way as to destroy many of its useful 
properties, or by careful management he may 
have made it more and more suitable for 
cultivation in the future. In taking out of the 
earth such things as stone, minerals, or clay, it 
is true, he cannot expect to leave the land as 
good as he found it, as he can when he takes 
away crop after crop of vegetable or animal 
produce. But while somewhat worsening the 
land, he may all the same be improving his 
surroundings as a whole. The stone or clay 
which he takes out of the land will certainly 
be not less but more useful to him when he has, 
for example, fashioned them into the walls of a 
house which he wants, than they were in their 
raw, unworked state. It is surely better to 
have a finished axe -head than the mere iron ore 
necessary to make such an axe -head. 

There is no simple means by which we can 
measure the extent or amount of improvement 
which the Man may have effected in his outward 
surroundings. The utility of the changes which 
have been effected is frequently increased or 
diminished, or akogether destroyed, by aUera- 
tions in the circumstances of the Man. When, 
for example, he has made a tool, some change 
in his knowledge may easily make it more 
useful to him than it was when he made it, 
while some other change in his knowledge may 



cause him to lay it aside as utterly useless. He 
has, let us say, with great labour dug a number 
of pitfalls in which to catch wild animals, and 
these require elaborate re-roofing each time 
they have come into action. Then he discovers 
some simpler kind of trap, which can be re-set 
time after time with no appreciable labour : 
such an invention will entirely destroy the 
usefulness of the old pitfalls, and the man will 
quite rightly, quite economically, allow them 
to go to ruin. Before the invention of the 
superior trap the pitfalls were useful objects 
or *' improvements " ; after it they are only 
troublesome holes in the ground. Even in the 
absence of such changes in knowledge and 
other circumstances, it is not possible to reckon 
up the amount of improvements as a whole and 
make definite quantitative statements about it, 
such as that it has increased by 30 per cent, in 
some particular period of time : we cannot 
make such statements, because we have no 
means of adding together different kinds of 
improvements and comparing their aggregate 
magnitude with that of some other group. 
How, for example, should we add together a 
row of apple -trees and a plough, and compare 
the magnitude of the result with that of the sum 
of improvement represented by a ditch plus 
a barn-door? Even when we have to consider 
precisely similar objects, their number will not 
afford us any precise guide for estimating the 
magnitude of the improvement in the man's 
material surroundings which they actually 
represent. It will be better, no doubt, for the 
Man to have two precisely similar spades than 
one only, but he certainly will not think two are 
twice as good as one— and he will be quite right. 




3. The Man's judgment in making use of 
his powers and surroundings is clearly of great 

To make use of them at all some effort 
is necessary. However great his powers, 
and however excellent his surroundings, they 
will not even feed the Isolated Man unless he 
exerts himself to some extent. Exertion should 
not be lightly pronounced agreeable or dis- 
agreeable in itself. Some kinds of exertion 
are probably always disagreeable to every one 
who is obliged, in order to attain his ends, to 
undergo them. But most kinds of exertion 
are pleasurable when not carried too far, and 
disagreeable only when carried beyond that 
point. We get into the way of regardmg all 
the exertion for which we are paid by other 
people as disagreeable, because we want the 
pay, and the exertion necessary to obtain it 
presents itself to us as an obstacle, and an 
obstacle is necessarily unpleasant and somethmg 
to be diminished if _possible. But if we were 
prisoners without any chance of earnmg any- 
thing, we should welcome our present employ- 
ments as most agreeable relaxation from the 
ennui of doing nothing. On the other hand, 
there is no doubt that all kinds of exertion 
become unpleasant if carried on for too long 
a time at once. The most passionate devotee 
of football or even golf does not wish to 
" play," as we call it, for eighteen hours a day 
and three hundred and sixty-tive days in the 
year. To "play" too long beconies a 
'* labour." This is true, no matter how diversi- 
fied the exertion may be ; every one requires 
a certain amount of absolute repose in the 
diurnal round. Hence the Isolated Man would 




be quite justified in regarding exertion as a 
thing to be reduced wherever possible. He 
could always have as much as he wanted of it, 
taken as a whole, and therefore he might as well 
have as little as he could in getting each par- 
ticular satisfaction. The first use of judgment 
is thus to keep efYort as small as possible in 
proportion to any given result. 

But this is not all. The Man would also have 
to seek a certain balance between effort and 
satisfaction in regard to each particular sort 
of satisfaction, and in regard to the whole taken 
together. He would have to arrange his 
activity and repose so that it might yield the 
maximum of satisfaction after allowing for any 
unpleasantnesses involved in the exertion itself 
or its incidental accompaniments. If he had 
to do this starting from a tabula rasa, it would 
be extraordinarily diflficult. But, in fact, habit 
would help him ; he would never have to start 
absolutely fresh, so to speak, and decide all 
at once to give so many hours to securing 
animal food, so many to each class of vegetable 
food, so many to making clothes, and so on. 
What he would have to do would be merely 
to decide whether it would give him more 
satisfaction to make some small reduction in 
the time and labour given to one mode of 
production and divert the time and labour to 
some other line of production, or, as another 
choice, to knock ofT the small amount of labour 
and give the time to repose. Of course even 
this might be a difficult question. If it were a 
choice between two different lines of production, 
the Man would have to weigh not only the 
satisfactions obtained, but the agreeableness or 
disagreeableness of the different kinds of labour 








involved. If it were a choice between the 
usual exertion and result on the one hand, and 
on the other hand sHghtly less exertion and 
result together with slightly more repose, he 
would still have to estimate three quantUies— 
the satisfaction foregone, the labour remitted, 
and the repose secured. 

Consequently, much depends on the accuracy 
of the Man's judgment as to the regulation 
and distribution of his effort. We have no 
right to assume, as we sometimes do, that his 
judgment is certainly infallible. In practical 
life we never think of doing so. We are 
always prepared to say that one of our friends 
overworks himself and should be content with 
a somewhat smaller income, and that another 
misdistributes his energies, giving too much 
of his resources to secure what we consider a 
disproportionately large amount of some par- 
ticular satisfaction. 

This would be true, even if there were no 
decisions to be made as to the distribution of 
effort between immediate and more distant 
ends. The necessity of making such decisions 
introduces a further complication. Not only has 
the Man to decide how much to work and how 
to distribute his labour between various kinds 
of satisfactions, but also to decide how far he 
is to sacrifice the present to the future or 
the future to the present. ^ In ordinary circum- 
stances there are three great choices open to 
him, and two of them may be adopted to a 
greater or less degree, as he chooses. He may 
arrange his work and consumption so that at 

X It is convenient to talk of " the present " as opposed to " the 
future " but it must be remembered that "the present means 
nothing more than the near as opposed to the distant future. 


the end of the period under consideration, the 
week or the year or whatever length of time 
we find it convenient to take, his position with 
regard to the future is just the same as at the 
beginning of the period, or so that it is more 
or less better, or finally, so that it is more or 
less worse. Any one of the three courses may 
be the judicious one, according to the circum- 
stances of the period. If the period is one 
of stress, during which the Man finds it very 
difficult merely to kee-p himself alive, if, for 
example, he is ill, he will be quite justified in 
allowing his position with regard to the future 
to deteriorate ; he will be right not to trouble 
for the moment about increasing his stores of 
knowledge and improving his material sur- 
roundings : he will be justified in reducing his 
stores of consumable articles, and even in allow- 
ing his tools, his house, and his other effects to 
fall into some disrepair. On the other hand, 
when his circumstances are very favourable, 
when he has no. difficulty in making ends meet, 
he will be a fool if he does not devote some 
time and labour to improving his position, 
either by increasing his powers or improving 
his material surroundings. He should not only 
try to provide for unfortunate contingencies, 
but also to secure that even in ordinary times 
his life will be easier in the future. Why? 
Because in the circumstances described the 
future gain will be greater than the present 
sacrifice. As his circumstances for the moment 
are favourable, he will not lose very much at 
the present by devoting a portion of his labour 
to fhe future instead of the present, and it is 
certain that he will know some way of expend- 
ing labour which will be of permanent benefit 







to him. He knows, for example, that if^ he 
can give ten hours to some investigation into 
the habits of some animal or the location of 
some plant, the knowledge will be as useful to 
him in the future as an extra hour per week of 
average labour would be. Or it may be that 
he knows that ten hours spent on the con- 
struction of some tool or other improvement 
of material surroundings will be as useful as 
an extra hour per week of average labour, of 
course after allowing for any labour that may 
be necessary to mend, and when necessary to 
replace the tool or other improvement. That 
is to say, ten hours labour now will bring in 
as much as fifty -two hours per annum in 
perpetuity. The Man's circumstances being 
favourable for the moment, he would be foolish 
not to grasp at the larger return, although if 
he were extremely pinched for the moment, so 
that every minute devoted to satisfying present 
needs was very important, he would be quite 
right to go on " living from hand to mouth " 
and not to attempt to make the improvement 
in his future condition. 

Of course only a limited amount of the Man's 
time should be devoted to the future, even when 
it is desirable that he should so devote some 
part of it. There are two reasons for limita- 
tion. In the first place, the more labour so 
devoted the less (in proportion to the amount 
of labour) is the advantage in the future, 
and secondly, the more labour so devoted 
the greater ' (in proportion to the amount of 
labour) is the loss in the present. For example, 
the Man may know one way of spending ten 
hours labour which will bring in a return, so 
to speak, of an hour a week or fifty -two hours 




per annum, but when he comes to think of a 
second way he*may not be able to find another 
which brings in a return of more than perhaps 
half an hour per week — i.e., twenty-six hours 
per annum, while the third way may only bring 
five hours, and so on. On the other side, also, 
he has to remember that while taking ten hours 
off his labour for immediate needs may involve 
no very severe privation, to take off a second 
ten hours will be a much more serious matter, 
and the deduction of a third might involve the 
loss of some absolute necessaries of life. 
Clearly the Man must stop somewhere, and the 
decision where to stop requires the exercise 
of a nice judgment. The Man will be likely 
to make a mistake, even if he can foresee all 
the future quite accurately. In fact, he will 
not be always right about the future, and 
consequently we must not expect that his 
decisions on this subject will approach any- 
where near to infallibility. 

It must be noticed that we have considered 
the Man's material welfare as a whole, begin- 
ning, it is true, at some arbitrarily chosen point, 
but without any further limitation. We have 
supposed the problem to be to maximize the 
Man's material welfare over all subsequent time. 
If we wanted to compare his welfare at one 
period with his welfare at some later period, 
say his welfare in 1890 with his welfare in 
1 9 10, we should have to regard the extent to 
which he thought it desirable to work for the 
future instead of for immediate results as one 
of the conditions on which his material welfare 
for the particular period depended. Given all 
other conditions, it is clear that the Man will 
be better or worse off for the moment according 


as he devotes more or less of his time and 
labour to present gratifications and less or more 
to improving his position with regard to the 

^4 We have so far assumed that the Man 
will desire to make his material welfare as 
great as possible, but this is not quite certam 
He may deliberately sacrifice some portion ot 
material welfare in order to secure some satis- 
faction which he regards as of a higher 
order. J. S. Mill in his earlier days and 
Baeehot thirty or forty years later thought 
that political economy must assume an 
imaginary being, often called the - Economic 
Man " who had no desire to do anything except 
pursue wealth. There is no need for making 
any such unlikely hypothesis except, perhaps, 
for simplicity at the very beginning of our 
exposition. It is quite easy to suppose tha 
our Isolated Man may sometimes deliberately 
prefer to do things which do not increase his 
material welfare. He may, for example, think 
it desirable to endeavour to secure happiness 
after death by propitiating some idol or other 
divinity by scourging himself or burning the 
best of his animals upon an altar^ ^^'LT'J 
he chooses to act in ways like this, the less 
other things being equal, will be his material 
welfare or wealth. 

The conditions which govern the material 
welfare or wealth of Society-^f a number of 
persons living in contact with each other-are 
for the most part, identical with those which 
would govern the wealth of Isolated Man, 
though some complications are introduced by 
association and by the mere fact of numbers. 


I . The original qualities of the race are 
obviously just as important to Society as the 
original qualities of the Man to Isolated Man. 
If the world had been peopled with a race 
of men with only one arm or with no eyes, we 
may quite confidently say that their material 
welfare would not have been as great as ours, 
unless the disadvantage was counterbalanced 
by some advantage which we do not possess. 
It is also true of Man in Society, as we saw 
it was of the Isolated Man, that the most 
favourable condition is not simply the greatest 
strength, but the greatest strength in propor- 
tion to physical requirements. It seems at first 
sight quite certain that we should not be as 
well off as we are if we were as small as Swift's 
Liliputians. But we begin to see that the 
question is not quite so simple as we supposed, 
if we ask ourselves whether it is quite certain 
that we should be much better off if we were as 
big as the Brobdingnagians. With the strength 
of a Brobdingnagian we should presumably 
acquire a Brobdingnagian appetite, and so be 
no better off than before, unless our numbers 
were reduced, for that might make an important 

2. Secondly, if we start from any particular 
point of time and consider the wealth of Society 
for the ensuing period, it is clear that the 
wealth of that period depends on what has 
been done by men in the past. 

(a) The powers of the people alive at the 
time must necessarily have undergone great 
change since their infancy, not owing only to 
niere " growing up," but also owing to prac- 
tice of the various arts and to deliberate educa- 
tion or drawing out of original powers. The 



conditions of Society may ^^^^^-ly ^'^^^JJ^^'J^ 
better in this respect at one time than at 
nnother No doubt the inhabitants of li-urope 
beSe the establishment of the Ko^an Empire 
were better educated and trained for the work 
they had to do than we are for that work ana 
the^xample suggests that it is d'^c 'It to se^ 
UD any absolute standard of education gooa 

fo^r M times and places. But ^-^^Sk 
conditions, no one can doubt that it is possible 
for the oeople to be better or worse trainca 
lor thos? cl^nditions, and ..hat the difference 
will qffpct their material weltare. 
""ilore important still than .the difference in 
skill due to education or training are the diHtr 
ences resulting from the varying quanti y of 
the knowledge of which the people may be in 
^'ossession. When we.look round and .j^sk ou - 
selves what are the rnain causes of the ™P^°\^ 
ment which has taken place in the materia 
Stion of the civilized world, we cannot fail 
to out among the chief of them the increase 
of knowledge We are able to use the forces 
o nXre so much more effectively than our 
r mote ancestors, not because we are natural y 
cleverer nor because we are better educatea 
than they but because each generation has 
acauired Aew knowledge, and has transmitted 
ft r posterity at first by word of mouth and 
afterwards by means of written and printed 
syiXls so that the sum of accumukited know- 
ledge hks been perpetually increasing 

% We saw that the materia condition of 
our Isolated Man would depend largely at any 
one dme on what he had done m previous 
Deriods to improve his surroundings, it xs 
SallJ true that the material condition of 


Society must depend largely on what has been 
done in the past by men in altering the 
arrangement of matter on the face of the 
globe. Next to the increase of knowledge 
the improvement (from man's point of view) 
of his material surroundings is the greatest 
and most obvious cause of his progress in 
material welfare. The face of the earth has 
been adapted by him to his purposes in many 
ways. The Suez Canal has practically altered 
the geographical situation of whole continents, 
and the Panama Canal will do the same. But 
these are in reality but small things compared 
with the immense network of roads and railways 
which covers the civilized and is beginning to 
penetrate the uncivilized parts of the globe. 
That network, again, is but a trifle compared 
with the adaptation of millions of square miles— 
in fact, the greater part of the land surface 
of the planet— to agricultural purposes. Then 
there IS the enormous stock of houses and other 
buildings in which people live and work and 
store things which will not bear exposure to 
the weather. Household furniture, tools and 
machinery of all kinds, including vehicles and 
ships, form another "mass of' metal, wood, 
and other materials originally extracted from 
the ground and now fashioned to suit man's 
purposes. And lastly, there is the stock of 
materials and food which has been raised from 
the ground and which it is necessary to keep 
for the supply, of sudden emergencies or to 
equalize supply over the different seasons. 
Kach generation of men is heir to all that has 
been left by its predecessors^ and the legacy 
seems to be larger at each transmission, not 
only absolutely but in proportion to the 



■' i 

» f 


■ u ;» it We must not expect 
numbers who inherit it ^e m ^^ ^^^ 

to be able to measure the grea ^^^^^ 

legacy by any numerical s^mdard^ ^^^ ^^^ 
do this any better for Society^ ^^^^^^^ 
Isolated Man. j. The ""'">^e be expressed 

material ^""^"'^^^^.timv of Changes in'^know- 
in numbers than the utility ot cna fe ^^ ^^^ 

l,dge. It is usefuUo have a know^^ g ^ ^^^^^^ 
ways in which steam can ^^^^j^. 

us ;. it is -f^ftl \°hings such as factories 
engines and of the iniiig necessary for 

ships, and "''-^"ef^^'Je supposes that we can 
their working. N° oj^^^f^bout the utility 
make numerical statemems ^^^^^^ 

of the knowledge we use, and no ^^^^^ 

suppose that we ^a" do so abo ;„„ 

of^useful objects which we u^em ^^^^ 

with that knowledge If ^e ^'^3 ^| should 
idea .of how us.eful the stocK , ^^^_ 

endeavour to •m=^g'"?,7^foie stock were swept 
dition to-morrow >f f^^^^Jf ,„ °eali^e what it 
away to-night. Let us try ^^^^^ 

would be like to have ^^^^ , it on, no 

to eat our f°od ^''f'J° 'tn no food ready in 
rooms to put the tables in, n ■ ^^ 

the larders, the shops or the g^ ^.^^ 
sheep, no cattle, but on^y a r ^^^^^^ 

rabbits, and birds, no railways ^^^^_ 

rve^ScepfatV-oa^nd very swampy 

""^ -ralteSo^o'f 'LS/su^^ouXgt 
permanent alteration u ^ permanent 


always to remain, and this, together with a 
perpetual increase in the stock of non- 
permanent useful objects which are replaced 
by up-to-date substitutes when they wear out, 
renders the position of each generation in 
regard to material surroundings more favour- 
able than that of the last. 

3- The wealth of Society, like that of the 
Isolated Man, will obviously depend on the 
judgment exercised in making use of its powers 
and surroundings. 

Effort, or labour as it is commonly called, is 
necessary for the use of these powers and sur- 
roundmgs in the case of Society as in that 
of Isolated Man. There is no more reason for 
pronouncmg effort or labour to be generally 
a good or an evil in the one case than in the 
other. But without regarding labour as essen- 
tially evil. Society, like the Isolated Mam is 
justified in desiring to shorten the labour 
requisite for the attainment of any particular 
aim, since it is always possible to have enough 
labour, and labour in excess of a certain 
quantity is an undoubted evil. Accordingly 
Society, like the Isolated Man, in order to make 
its material welfare or wealth as great as 
possible, must adopt the easiest methods of 
attaining its ends, and must regulate the whole 
ot its labour so that it works just up to the 
point at which the labour and the produce of 
the labour taken together (the disagreeableness 
ot the labour, if any, being deducted from the 
agreeableness of the produce) pause the most 
satisfactory result. Society must at the same 
time distribute its total labour between the 
various possible channels in the manner which 
will bring about the best result, when both 




the labour and the produce are taken into 
""'Drfficuh as this is for the Isolated Man it is 
ten times more so for Society T. the Jom- 
Man has a single bram to estimate the com 
JL'ativradvantfges of all the different courses ; 
Society has no common brain, but millions ot 
senate ones. To cast up with any consider- 
ate approach to accuracy the total pleasure 
and pah^ resuhing from any particular arrange- 
menrwould requtre knowledge far beyond tha 
which could be possessed by any person or 
"ommittee served W the most Pe^fect or^aniza- 
tion which we can conceive. In practice, 01 

cours" Society, like the I-'-'^d M^"' ^f^^^^how 
to start from the beginning and decide how 
much time or labour shall be given to the 
production of food, how much to clothes, and 
SO on Some distribution is in torce, ana 
aU that has to be decided is whether this dis- 
rributfon shall be slightly altered in one 
direction or another. But even this is a very 
difficuh matter, in which the probability of 

"Tt'difficX/ofThe Isolated. Man as to the 
dislribudon 0/ effort between immediate and 
distant ends is also present in the case ot 
Society The only difference is that it is 
con^derably greater. Isolated Man, as we have 
Sined hL with an infinitely long duration 
oTufe would be able to estimate the desira- 
blity of skimping enjoyments h. t - P-^-" 
in order to secure more in the future tar more 
correctly than a society consisting of persons 
wi^a short duration of hfe, who have to 
Smate%he desirability of sk-^^^^^^ 
own enjoyments in order to increase tnose oi 



their successors. Little as a single man may 
be able to compare the advantage of, say, 
10 per cent, less this year for himself compared 
with I per cent, more in every future year for 
himself, he can perform that feat more easily 
and accurately than a number of persons can 
compare lo per cent. less this year for them- 
selves with I per cent, more in every future 
year for such of themselves as may happen 
to be alive and the successors of those who 
are dead. They cannot estimate the strength 
of the desires of the future persons so well as 
a man can estimate the strength of his own 
future desires, and they do not know what 
changes in numbers there may be. The greater 
the numbers in the future, the greater, ceteris 
paribus, the desirability of present saving. Still 
further difficulty is introduced by the fact that 
the numbers will be themselves affected by 
the amount of saving. The more that is saved, 
the greater the population of the future is 
likely to be. 

Here, as in regard to the Isolated Man, we 
must remember that we are thinking of the 
wealth of Society from some point of time 
onward, taking immediate and more distant 
future as a whole. We might, of course, take 
some particular period of time, such as a year, 
and ask ourselves on what depends the wealth 
of Society for such period. In that case we 
should have to regard wealth as (for the time, 
of course) reduced by any skimping of present 
enjoyments for the purpose of increasing 
future enjoyments, however much the future 
enjoyments might in the end exceed those lost 
during the period considered. 

4. Society, just as much as Isolated Man, 




may be, and often is, willing to sacrifice a 
certain amount of wealth in order to secure 
some other end which it, or at any rate the 
ruling part ot it, thinks preferable. 

In addition, however, to these causes ot 
variation common to Isolated Man and Society, 
we have to add three others allectmg Society 

alone. , , __ , 

5. Though the health of Isolated Man and 
also of the individual members of Society 
may be regarded as the result of original per- 
sonal qualities and what has been done in 
the past to improve or worsen them, yet in the 
case of Society health seems to require separate 
classification in so far as it affects the duration 
of working life. A people will clearly be 
stronger and more capable of producing goods 
if a less proportion of the aggregate number 
of years lived are years of childhood and old 
age It would be better for all to die at 
70 than for half to die at 50 and half at 90 ; 
it would be better, too, for half to die at 50 and 
the other half at 90 than for five out of six 
to die at 15 and the other at 65. 

Moreover, the proportion of persons ot work- 
ing age in a population at any moment is 
affected not only by this different distribution 
of lifetime between working and other years 
caused by differences of mortality, but also by 
increase and decrease of population. A popula- 
tion increasing " naturally ''—i.e., by excess of 
births over deaths, must necessarily have, ceteris 
paribus, a larger proportion of children ; if 
the increase has been going on steadily tor a 
long time, the weakness from this cause will to 
some extent be counterbalanced by the smaller 
proportion of old, infirm people. Similarly a 


decreasing population will have a larger pro- 
portion of old people, and if the decrease is 
continuous, the weakness from this cause may 
be counterbalanced by the smaller proportion 

of children. 

We must say, then, that Society's wealth 
partly depends upon the age-composition of the 

6. It is also dependent on the advantage 
taken of the benefits derivable from co- 
operation, or combination and division of 


7. Finally, it is dependent on the nearness 
of population to the most suitable magnitude. 
These last two heads will be dealt with in the 
two following chapters. 

II 1 








A NUMBER of men living in such circumstances 
that they can communicate with each other 
may, if they choose, work together or co- 
operate. Co-operation, intelHgently directed, 
enormously increases their aggregate power of 
producing the effects they desire. 

The advantage of what has sometimes been 
called *' Simple Co-operation " — the kind of co- 
operation which takes place between a number 
of men when they unite their forces in doing 
precisely the same kind of work — scarcely needs 
detailed exposition. Two isolated men within 
hail of each other would obviously often be 
justified in abandoning their isolation in order 
to assist each other in tasks which were beyond 
the strength of a single man but within that 
of two, such as lifting a heavy weight, or 
which could not be accomplished quickly 
enough by a single man, such as the getting in 
of a crop of grain while the weather holds. 
Scientific discussion and interest relate ex- 
clusively to more complicated forms of co- 
operation, sometimes called " Complex Co- 
operation," but more usually " Division of 

Labour," in which different kinds of work or 



labour are allotted to (or ** divided " between) 
several or many different individuals who^ con- 
sciously or unconsciously, unite their forces for 
the attainment of some end. 

I . The first of the advantages of division 
of labour is that it enables man to make the 
best use of the various qualities possessed by 
different parts of the surface of the earth. If 
each man worked entirely by himself, he would 
be obliged to get everything from a very small 
area. Even if he wandered about, and managed 
to avoid coming into fatal collision with other 
men in the course of his wanderings, he could 
not cover very much ground, and if he had a 
home to which he returned every night or 
even every few days, his range would be so 
small that he could only reach a small selection 
of the numerous materials which we consider 
"necessaries of life." Even those men who 
were lucky enough to find themselves in what 
would then be considered the best situations 
on the globe, where all the barest necessaries 
of life and a few luxuries could be obtained, 
would be confined to a very few of the minerals 
and other things which we dig or quarry from 
the earth. The situations least suitable for 
such a social or anti -social state, where the 
available selection of materials is too small, 
would be quite uninhabitable. With division 
of labour, on the other hand, it becomes 
possible to make full use of a situation which 
is only good for the production of one or a 
few articles or services, as the Rand is 
good for producing gold and Jersey for pro- 
ducing early potatoes. 

The importance of this is obvious, and it is 
illustrated by well-known facts in the history 


to a small selection of materials, they ^av^ 
little opportunity of makmg mechanica 
improvements, e/en if they had the necessary 
nvf^ntive faculty. ^ Civilization started where 
communication, and consequently ^^'^P^^fj^^^ 
were easiest, and so far as we can go back i« 
history the peoples which are now civihzed 
have Ld a I'arg'e supply of Products brough 
from distant places. Silver and gold for 

example, found only on ^^ ^ ^^ , ^fi^'^' i^^^^^^ 
always been spread over the whole area ot 

'"wfrTst not think only of the impossibUity 
of obtaining certain products from cer am 
areas There is a good deal more than that 
?o be considered. There are many degrees o 
difficulty short of the infinite degree which is 
Hteral impossibility. We get coffee from 
Braztl, tea^ from Ceylon, and bananas from 
Teneriffe or Jamaica, not because ^^ ^ abso 
lutely impossible to grow these things n 
EnRland, but because it is much more difficult 
to grow them here where the soi land climate 
are not so suitable. Soils and climates differ 
fn such a way that the wants of mankind as 
L' 21 can 'obviously be best satisfied by a 
certain concentration not merely « the mdus 
tries which can only be carried on ^^ particular 
nlaces but also of a great many others tor 
K the circumstances of some^ P^^^^^^^^^". 
more favourable than those of others. What 
^ reauked may, perhaps, be easier grasped if 
we confine our"^ bought^ for the moment to the 



area of a single farm which includes several 
soils and aspects. In such a case the cultivator 
will consider these different soils and aspects, 
and distribute the land between different 
products in the way he thinks will be best on 
the whole, taking everything into account. It 
would be obviously the act of a madman to 
insist on growing a little of everything on 
each acre, or to cut the farm up into sections 
for wheat, meadow, potatoes, and so on with 
no regard to anything except facility of trans- 
port to the homestead. Mankind at lar^e is 
in much the same position : it will find it 
advantageous to concentrate each of the great 
majority of industries to some extent on par- 
ticular areas, although this course involves more 
labour of transport. The chief difficulty which 
we encounter in extending our view from the 
single farm to the world arises from the fact 
that in dealing with the single farm we usually 
accept the position of the homestead, and 
consequently also the destination of the pro- 
duce, as settled once for all by historical cir- 
cumstances. When we consider the world at 
large, on the other hand, we have to allow for 
the fact that the location of mankind is not 
fixed. Consequently the position of the con- 
sumers cannot be taken as given ; the question 
of the concentration of particular kinds of pro- 
duction in particular areas is inextricably inter- 
twined with the question of the distribution of 
population. To attack the problem in its most 
abstract form, we should suppose ourselves a 
benevolent being with the Earth uninhabited 
before us and its whole population in our hand 
ready to be planted where we please on its 
surface and to do what we order. How 



should we then best arrange the people and 
the industries? The task would certainly be 
a puzzling one, but with omniscience we could 
solve it exactly, and the solution would 
obviously involve a considerable concentration 
of industries and of population on particular 
areas. It would probably be seldom, if ever, 
desirable to concentrate the whole production 
of any particular commodity in a single district 
since the disadvantage of having to transport 
the product to every place where for any reason 
it was desirable people should live would 
seldom be overbalanced by the superior quali- 
ties of any one district : for example, it might 
be desirable to plant a certain amount of cotton 
manufacture in South Carolina or Bombay, 
although neither of those places were quite 
so suitable for the actual production, con- 
sidered apart from transport, as Lancashire. 
So concentration would usually be only con- 
siderable—certainly not unlimited. 

We must be very cautious about accepting 
any short and taking phrase for a summary 
description of the advantage resulting from 
the local concentration of industries, lo say, 
for instance, that it - enables everything to 
be done in the place best fitted for the pur- 
pose " is not satisfactory, since it often happens 
that one place is the best fitted for carrying on 
two or even more than two, dififerent industries. 
Then as there is not room for more than one, 
the others must be placed not in the best but 
in the second or even third, fourth, fifth, or 
sixth best place. Industries must be arranged 
in what is the best way on the whole, taking 
into consideration all of them and also the 
amenities enjoyed by the consumer so far as 



these are to be considered separately from the 
industries. This last proviso, concerning 
amenities, is necessary in order to prevent 
such things as the discomfort of living in a 
bad climate from being overlooked. A con- 
centration of industries which was extremely 
good so far as the mere product of the in- 
dustries was concerned would be a very bad 
one if it compelled a large part of the people 
of the world to live on the Antarctic continent. 
If we adhere to the phrase adopted at the 
beginning of this section, and say that co- 
operation enables man to make the best use 
of the various qualities possessed by different 
parts of the earth's surface, we seem to be on 
fairly safe ground. 

In practice, of course, the question is never 
presented as a whole. The past course of 
the world's development has resulted in a 
certain distribution of people and industries 
over the face of the earth, and it is obviously 
undesirable to make, or rather to attempt to 
make, any very enormous change in it suddenly, 
even if we think we know that a wholly different 
arrangement would be best if we were to start 
with a tabula rasa. We are actually more in 
the position of the farmer we mentioned just 
now, who comes into possession of a farm 
already provided with a homestead in a par- 
ticular spot, and already divided into fields, 
each of which has had certain qualities given 
to it by the past labour of man, so that it is 
more appropriate for some purposes and less 
appropriate for others than it would have been 
if left in its natural state. Such a cultivator 
has not to consider the very difficult questions 
of what would be the best position for the 




homestead and what would be the best distribu- 
tion of the whole area of the farm between 
different kinds of cultivation if he could as he 
would say, " start the whole thing i^f\ t>ut 
only the much easier questions of whether it 
would pay him to take down and remove the 
homestead to another situation and alter the 
acquired qualities of all or some of the helds, 
as/for instance, by ploughing up the pasture 
and converting the meadows to arable cultiva- 
tion or by removing some of the hedges or 
walls in order to redistribute the area on new 
principles. In the same way, if we take the 
world at large at any particular moment, we 
find people already settled in certain propor- 
tions over its area, with their homes and work- 
places already built, and the land, or most ot it 
already adapted by the past labour of mankind 
to various uses. We find, too, that the popula- 
tion of the globe, consists of various races, tor 
the most part concentrated on particular conti- 
nents and in particular countries, and that these 
races are of very various powers or in very 
various stages of development It would 
obviously be impossible, and undesirable it it 
were possible, to make any great, sudden re- 
distribution of these people, their homes, and 
their industries. All that mankind has to do 
is to change things very gradually in the right 
direction. It was, for example, never neces- 
sary to remove the iron-workers ot bussex or 
the woollen-workers of Wiltshire to Yorkshire : 
the redistribution was quietly accomplished by 
the rise and growth of these occupations in 
Yorkshire, coupled with the dying out of the 
iron-workers in Sussex and the absence of 
increase among the woollen -workers of Wilts. 


The names " territorial division of labour " 
and *' localisation of industry " have sometimes 
been applied to co-operation which involves 
the concentration or, as perhaps it would be 
safer to say, the unequal distribution of in- 
dustries on the face of the globe. 

2. The second great advantage of division 
of labour is that it enables labour to be so dis- 
tributed between different persons that their 
original or natural qualities may be best 
utilised. According to the old distich, " Adam 
delved and Eve span," but this is a fourteenth 
century anachronism. Modern research rather 
suggests the probability of Adam having been 
a thorough " gentleman " of sporting pro- 
clivities, while Eve did any heavy work which 
had to be done^. There is not much reason 
for beheving that primitive man arranged co- 
operation in the most satisfactory way so far 
as this advantage is concerned ; the strength of 
the strong was apt to be utilised not in carry- 
ing the heaviest burdens, but in forcing them 
on the backs of the weaker. Nevertheless, 
at any rate in times of stress, the advantage 
of distributing the whole of the work to be 
done among the old men, the young men, the 
women, and the children in such a way as to 
make the best use of their respective powers 
must have been apparent even to the most 
primitive barbarians. A very little considera- 
tion is necessary to make us see that this rough 
division can be improved by taking into 
account the various natural qualities of the 
different persons in each of the four classes. 
In each class we find great and little strength 
and stature, great and little mental ability. 
Examining still more minutely, we find that 



some have the particular strength of mind or 
body appropriate for some particular kmds ot 
work, ^^ile^thers have the strength required 
for other kinds of work. Obviously it w 11 be 
better to divide the whole of the work to be 
done between all the workers concerned in 
such a way that the work requiring great 
strength is given to the strong, work requiring 
dextefity of^mind to the clever, and so on, a 
far as possible. The proviso as far as 
possible" is necessary because, just as it is 
not true to say everything must be done 
in the place best fitted for it, so it is not true 
to sav everything must be done by the person 
L^^st Lted Tor it^ Often the Pfrson best fitted 
for one kind of work will also be the best 
fined Tor another kind of work or for severa 
other kinds : he must then be allotted the 
?aboui which it is best he should perform when 
he ^edal capabilities of all the workers m- 
eluding himself, are taken into consideration. 
Some ^of the ^o^rk will then necessanly be 
allotted not to the person best fitted for it 
but to the second, third, fourth, and fifth best 

^'\'n' practice this advantage of division of 
labour is inextricably mixed up with the third, 
to which we now proceed. ^ ,. . . ^ . , , „^ 
-i The third advantage of division of labour 
lies in the fact that it enables much greater 
skill and dexterity of hand and brain to be 
acquired for eacl/ of the various occupations 
" Jack of all trades " is proverbially master 
of none " A person who had to supply all 
h s own needs would have to do so many things 
fhat he could not expect practice to make him 
perfect at any of them. When different kinds 



of labour are allotted to different persons, so 
that the whole or greater part of the working 
time of each is given to one or at any rate a 
few kinds of labour, each acquires in a high 
degree that special dexterity required for his 
particular work which is obtained by practice. 
Furthermore, it becomes possible to give to 
each person the perhaps more important kind 
of skill and dexterity which is to be obtained 
by education or deliberate training. Human 
life is far too short to make it worth while 
to give individuals the elaborate training 
necessary for more than one of the more diffi- 
cult employments. To train a man adequately 
for one of them takes a large slice out of his 
life. Evidently there is great economy in 
training each person for at most a very few 
employments. This is specially remarkable in 
what is generally called " scientific research." 
In modern times discoveries of new means of 
utilizing natural forces are not to any great 
extent made by accident, but are for the most 
part the result of investigations which could 
only be carried on successfully by men who 
have spent not years, but decades, in being 
trained and training themselves. 

This advantage is necessarily mixed up with 
the second, because when once particular quali- 
ties have been acquired, it does not matter 
whether they have been acquired by training 
and practice or are the result of " original " 
or " natural " characteristics. At any particular 
moment we find the persons who form the 
population of the globe endowed by nature 
or education with certain qualities, and the 
problem before mankind is to make the best 
use of these qualities, regardless of their origin. 



So it must often happen that persons whose 
natural or original qualities marked th^m out 
for some one occupation can bes be retamed in 
some other occupation for which they h^^^e as 
a matter of fact been trained To secure the 
fullest advantage of the possibility of d yiding 
labour according to the natural qual it es ot 
the workers it is necessary to distribute the 
required education and training in the Dest 
manner Under any conceivable circumstances 
this would be a difficult thing to do, even if 
the future could be exactly foreseen in all 
its details. But the future cannot be exactly 
foreseen, and this increases the diflaculty of 
securing even an approximation to a correct 
distribution of persons between the var ous 
occupations in accordance with their natural 
and acquired characteristics. ^ ,. . . . 

A The fourth advantage of division of 
labour is that it greatly facilitates the acquisi- 
tion and retemion of the sum of knowledge 
which is transmissible from one generation to 
another This is quite distinct from the advan- 
tage of skill and dexterity just discussed. 
Skill and dexterity enable people to use knovvn 
processes effectively, but knowledge reveals the 
processes themselves. Without division of 
labour the inventions and discoveries which 
have made modern man's power over the forces 
of nature so much greater than that of his 
remote ancestors could not have been made, 
because no man would have had time to 
specialize sufficiently in the particular linw of 
smdy required. When the knowledge Has been 
once acquired, it would often be lost if it were 
not for the existence of books and instruments 
which could not be produced without division 




of labour. In other cases the retention of the 
knowledge in the world is only effected by 
means of the exertions of a class of educators, 
which, again, could not exist in the absence 
of division of labour. 

5. The fifth advantage of division of labour 
is that it economises tools and machinery of 
all kinds, including the buildings in which 
work is carried on. By this we mean that it 
makes a given amount of machinery " go 
farther," or be more effective, and so makes 
it advantageous to mankind to provide itself 
with machinery which would otherwise be too 
costly. Every one has experienced diffi- 
culties from the want of appropriate tools when 
he has attempted quite simple jobs outside his 
own trade or profession. " Jack of all trades " 
is not only unskilful, but also ill -provided with 
tools. Evidently if every one had to do all 
kinds of work, it would have to be done for 
the most part with very much less effective 
tools and machinery than at present. As things 
are, these things can be liberally provided, 
even when costly, because the division of labour 
allows them to be kept in continuous use, which 
would be impossible if every one had. a com- 
plete equipment of each. 





TO the Isolated Man in possession of jhe wIkUc 
world there could be no question of 1 opulation 

"of too many or too few lj,""^.f ,>^"f \, " 
we suppose the world mhab.ted by large 
numbers of isolated men, men that is to say 
who did not co-operate, the question wou d 
be Dresent, but n a very simple form. Lacn 
man' could only be benefited by the existence 
and consequent actions of the others m an 
incidental way, as, for example, he would be 
beneficed by their killing off tigers or =nakes 
to protect themselves. On the other hand he 
wou'ld be injured by their occupation of land 
and catching of beasts which would be useful 
?o him and the greater their numbers the 
worse his position ^ould be : obviously, the 
more numerous the human beings, the less land 
S would be for each, so that each man would 
have a s"'''"" command of space and materials 
for agricuhure and other industry. It would 
seem probable that this disadvantage of arge 
numbiJs would much more than counterbalance 
its incidental advantages in all ordinary 

"' xd^xlst'ence of co-operation modifies the 
situation very greatly without making any 




fundamental alteration. The advantage of 
having a number of neighbours becomes more 
than a matter of freedom from attack by wild 
beasts killed by those neighbours entirely for 
their own purposes. Co-operation being estab- 
lished, people enjoy the advantages of it, which 
we have already described, and the more people 
there are the greater can be the advantages 
derived from it. But there must always be 
a point at which the advantages are just 
counterbalanced, and beyond which they are 
more than counterbalanced, by the disadvantage 
of less space and materials per man. The 
disadvantage of putting "too many" people 
on a given space of ground has been observed 
from the very earliest times. '* Abram," we 
are told, "was very rich in cattle . . . and 
Lot also, which went with Abram, had flocks 
and herds and tents, and the land was not able 
to bear them, that they might dwell together 
. . . and they separated themselves the one 
from the other." If people had imagined they 
could live in unlimited numbers on any given 
area they would have squeezed themselves all 
into a fertile held just outside the Garden of 
Eden, or on the slope of Ararat, or wherever 
the original home of the human race may have 
been, instead of spreading all over the globe. 
If it is thus obviously possible to have over- 
population on a portion of the earth's surface, 
it must also be possible to have it on the earth 
as a whole, which is only made up of its several 

Put in this way the theory of population 
seems to be little more than a very obvious 
generalization which scarcely admits of dis- 
cussion. But it has a rather complicated 






history without some knowledge of which it 
rSuU to understand the form wh'clj modern 
discussion of the subject usually takes 
economic works. , -t-i.„ 

We need not go back ^"y ./f ■„ V'! 
ancient Greek philosophers regarf was quke 
4^;^r. frnm a noint of view wnicn was 4UIL1. 
Cerent" frorVt of the modern eco 
nnmist They were mterestcd m what arc 
caTed politkal rather than economic ques- 
tinns and their polit cs were the politics ot 
smai ci?y states. ^So they inquired how many 
Zp e cLld be properly governed in a city 
state but not how many should live on a 
Xven soace of land in order to bring about 
fhlbestP economic results.. The Popu ation o^ 
any considerable territories knovvn to them 
r,rnbnblv did uot incrcasc perceptibly enough to 
Cke them ask whether it should ever stop, and 
H so S In the Middle Ages, too, through- 
out Europe population did not increase fast 

^° vTrv'Te'quenf comp inls' of depopulation 
couched in sTch a form as to imply that no one 
could possiWy imagine depopulation to be a 
Xd thing In the seventeenth century growth 
ff° popiTtion was visible in ^^-ngland and 
persons interested in the colonization of Virgin a 
tried to show that it would be much Dctter ii 
arge numbers of people were shipped across 
he Atkntic but their arguments did not lead 
to the emergence of any general theory. In 
the efght^enfh century the great wars led each 
nat,on to desire the largest possible population 
wUhout thought for the economic consequences. 



As one who wrote towards the close of that 
century observes, " Population ! Population ! 
Population at all events ! " was the universal 
cry throughout Europe. 

The history of the p^opulation theory, in fact, 
only goes back to the middle of the eighteenth 
century, when its origin is to be found in the 
controversy which then took place between 
certain scholars about the population of the 
world, or rather the " populousness of ancient 
nations." Some writers contended that the 
number of people was much greater in ancient 
than in modern times. Others, among whom 
Hume was pre-eminent, took the opposite view. 
It was only natural that some of the disputants 
should, in the course of discussion, hit on the 
plan of enforcing some argument by showing 
how rapidly population would increase if human 
fecundity had full scope and mortality were 
normal. Robert Wallace did this in I753_with 
the object of showing that there was no diffi- 
culty in supposing that the population had 
increased so much between the Deluge and 
the time of Alexander the Great as to be greater 
at the end of that period than it actually was in 
the eighteenth century. He constructed a table 
showing that if we suppose six children to a 
marriage and a mortality which destroys two 
of them before they Have time to become 
fathers and mothers, the total population will 
increase in 1,233 years from two persons to 
over four hundred and twelve milliards 
(412,316,860,416). Such a table makes it 
very obvious that, as Wallace says, " there 
has never been such a number of inhabitants 
on the earth at any one point of time, as might 
have been easily raised by the prolific virtue 










of mankind." It also leads to the inquiry 
" What are the circumstances which have 
rnnressed the growth of population? and to 
represscu mc b "(•■,„ these repressive 

the further inquiry Can tncse rcpi 

influences be removed? w.lHre decided 

Some of the circumstances, Wallace aeciuci, 
werc^hy° cat and independent of the volition 

^f' ir' Others were due to, f^, "•■°[^, '^ 
vices of mankind, and '"'S'^^- ^^'^..^ '^Jf^ V 
removed by better govcrnnient But thty couk 
not be altogether removed even by a periecv 

^°''Trnder*a perfect government" he says, 
" the inconveniencies of having a family would 
he so endrely removed, children would be 
so well taken ^care of, and everything become 
so favourable to populousness, that though some 
skkW seasons or^d?eadful plagues in particular 
rUmates might cut off multitudes, yet n 
' reral mMkind would increase so prodigiously 
tCt the e^rth would at last be overstocked, 
and become unable to support its numerous 

'" EvSTf •"" some extraordinary method of 
sunoorting" the people were discovered, the 
inevtoble would only be postponed, since soon 
• ?here would not even be sufficient room for 
containing their, bodies uponthe surface o 
tUn pirth " It IS certain that hmits are sci 
to the fertility of the earth, and that its bulk 
so far as s hitherto known, hath continued 
always ?he same, and probably could not be 
S altered without -aking considerate 
rhinsres in the solar system. Iheietorc uie 
Seatest idmirers of such fanciful schemes must 
foresee the fatal period when they would come 
to an end" in a "catastrophe. Barbarous 

and unnatural regulations would have to be 
introduced, and mankind would never agree 
about them, but would fall to fighting over 

In his Essay on the Principle of Population^ 
1798, Malthus borrowed this argument from 
Wallace to use it against the Utopian anarchism 
of William Godwin. Population, or " the 
principle of population," as he sometimes ex- 
pressed it, must, he thought, be kept in check, 
and all checks resolved themselves into vice or 
misery, so that no Utopia could be possible. 
But he was not content, with Wallace^ to 
suppose there must at last be a catastrophe. 
He thought that " the difficulty, so far from 
being remote, would be imminent and imme- 
diate." He thought so because he was imposed 
upon by a misleading mathematical jingle 
which he had invented. " Population," he said, 
" when unchecked, increases in a geometrical 
ratio. Subsistence increases only in arith- 
metical ratio." His one example of an increase 
in geometrical ratio was doubling every twenty- 
five years, and his one example of an arith- 
metical ratio was increasing by an amount equal 
to the original amount every twenty -five years. 
If these two series, i, 2, 4, 8 . . . and i, 
2, 3, 4, 5 • • • are placed side by side, it is 
obvious that after the second term the first 
series increases much more rapidly than the 
second series, and Malthus inferred that there 
must consequently be " a strong and constantly 
operating check on population from the diffi- 
culty of subsistence." For the doubling of 
population in twenty-five years he relied on 
the experience of North America, and here he 
was on firm ground, since whether the period 







he gives is longer, as Tie supposed or shorter 
than the reaUty, there is no doubt that a" 
-unchecked" population would double itselt 
in some short number of years. But tor t le 
"arithmetical ratio" of the increase ot sub- 
sistence-for his assertion that the subsistence 
could only be made to increase by an amount 
equal to the original amount every twenty-hve 
years he had no warrant at all. He relica 
merelv on a nebulous supposition. iurmng 
Ss eyes away from his North American 
example, where, unless, which there was no 
reason to believe, the existing people were 
worse fed than their much less numerous 
ancestors, subsistence must have increased in 
the same geometrical ratio as the population, 
he asked his readers to ^' take any spot of ear h 
this island, for instance, and see in what ratio 
the subsistence it affords can be supposed to 
increase. ^^ ^^^^^ ^^ ^ ^^^^^^ ^^^^ ^^ ^^^ ^ 

possible policy, by breaking up more land, and 
by great encouragements to agriculture, the 
produce of this island may be doubled in the 
first twenty-five years, I think it will be allow- 
ing as much as any person can well demand. 

'' In the next twenty-five years it is ^"J- 
possible to suppose that the produce could be 
quadrupled. It would be contrary to all our 
knowledge of the qualities of land The very 
utmost that we can conceive is that the increase 
in the second twenty -five years might equal 
the original produce. Let us, then, take this 
for our rule, though certainly far beyond the 
truth, and allow that by great exertion the 
whole produce of the island might be increased 
every twenty -five years by a quantity of sub- 

sistence equal to what it at present produces. 
The most enthusiastic speculator cannot sup- 
pose a greater increase than this. In a few 
centuries it would make every acre of land 
in the island like a garden. Yet this ratio of 
increase is evidently arithmetical. It may be 
fairly said, therefore, that the means of sub- 
sistence increase in an arithmetical ratio." 

It is doubtful if " enthusiastic speculators " 
would have admitted that the produce of Great 
Britain could not possibly be quadrupled in 
fifty years from 1798, but whether or no, 
Malthus does not prove his case, since it is 
clear that produce had doubled and quadrupled 
within the periods supposed in the North 
American colonies : if this ever happened any- 
where, it must be wrong to lay down as a 
general proposition that the means of subsist- 
ence can only increase by equal amounts every 
twenty -five years. Moreover, even if we con- 
fine the proposition, as we may suppose Malthus 
unconsciously did in his own mind, to countries 
already as thickly peopled as Great Britain 
was in 1798, he resembles the candidate in 
geometry, who claimed that if he had not 
exactly proved the proposition set before him, 
he had at least made it appear highly probable. 
It might seem highly probable to reasonable 
persons that the produce of Great Britain could 
not be quadrupled in fifty years, and certain 
that it could not go on being doubled every 
twenty -five years thereafter. They might even 
be tolerably sure that it could not be increased 
every twenty -five years for the next century by 
more than an amount equal to the produce in 
1798, and certain, though Malthus does not sug- 
gest this rather obvious reflection, that it could 


not go on indefinitely increasing, even by equal 
amounts every twenty -five Y^f^- ^^,^' '^^^^ 
one might ask, ^ Why not? ^^^^ ;^;^7. 
mouth God sends a pair of hands as the pro 
verb says, so why should not the increased 
number of people be able to g^«^^ ,^ P',^P^(5, 
tionately increased amount of P7^y;^^Xle to 
even more, seeing that they would be able to 
draw greater advantage from division ot 
labour?" Malthus' argument gives no answr 
to these questions except what ^^ ob^^,^^^^7^ 
implied in ''it would be ^-^^^^ , ^^^om^^^^ 
knowledge of the qualities of land Common 
knowledge of the "properties of land tcUs 
us that i? would be impossible to get an infinite 
amount of produce from any limited area -en 
if we could increase the amoun of labour 
expended on that area indefim tely. It a^^^^^ 
tells us which is more important for practical 
nurposes that the amount of additional produce 
S can be got by equal additional amounts 
of labour expended on the limited area will 
bec^in to diminish before, and often, per- 
ans we might say generally, long before the 
ofnt is Tefched at"^ which additional labour 
would bring in no additional return at all. 1 he 
Tru^h was well expressed in a criticism which 
Turcot wrote upon an obscure essay sent in 
fori prize offered by the Royal Agncultural 
Society of Limoges about 1768 He ^ays_ 
" Seed thrown on a soil naturally fertile but 
totally unprepared would be expenditure almost 
entlely wasted. If the ground were once 
Xd the produce would be greater ; ti ling it 
a second and a third time might not double and 
uipTe but quadruple or decuple the produce, 
wfich will thus augment in a much larger 



proportion than the expenditure, and that up to 
a certain point, at which the produce will be as 
great as possible compared with the expendi- 
ture. Past this point, if the expenditure be 
still increased, the produce will still increase, 
but less and less, and always less and less, until 
the fecundity of the earth being exhausted, 
and art unable to do anything further, an 
addition to the expenditure will add nothing 
whatever to the produce." 

The statement, of course, applies to some 
or any one given time, so that it excludes the 
consideration of the changes in man's know- 
ledge and other circumstances which will from 
time to time alter the position of the " certain 
point, at which the produce will be as great 
as possible compared with the expenditure," 
and also the position of the ultimate point at 
which the fecundity of the earth is exhausted 
and art unable to do anything further, so that 
" an addition to the expenditure will add 
tiothing whatever to the produce." In fact, 
the knowledge and circumstances of mankind 
are continually changing, and very often, 
probably in the majority of cases, the change 
is of such a nature as to shift the points in the 
direction which is favourable to the productive- 
ness of additional labour. Hence cornmon 
knowledge of the properties of land, while it 
does tell us that population cannot, at any one 
time, be greater than a certain size without 
causing the returns to industry to be less than 
they might be, certainly does not tell us that 
population cannot double itself in twenty-five 
years, treble in fifty, and quadruple in seventy- 
five, nor even that it cannot double every 
twenty-five, quadruple in fifty, and octuple in 




seventy-five years without causing any diminu- 
tion of returns. The most we can say is that 
such rapid progress is unhkcly to go on long, 
and certain not to go on for ever 

Malthus himself never attempted to bring his 
theory of population into close relationship with 
the law of production laid down in the passage 
lUSt quoted from Turgot. Though the law 
must have been latent in the mind of every 
prudent farmer with sufficient means to over- 
cultivate if he wished to do so, and though it 
was, as we see, clearly stated by Turgot in 
1768, its history does not really begm till 
I 8 14 At that time much discussion took place 
in England about the new duties on the im- 
portation of corn which were supposed to be 
required in order to keep the price of corn up 
to what was considered a remunerative figure 
Moderate men thought this would be about 
80s the quarter for wheat, but most agri- 
culturists seem to have demanded a good deal 
more. The dispute led people to give some 
attention to the cost of cultivating the new 
land which had recently been taken into cultiva- 
tion in consequence of the high prices which 
were brought about by bad seasons and in- 
creasing population, fitde or no importation 
be'ng possible during the war AH authorities 
agreld that the cultivation of the new land 
was highly expensive. The high protectionists 
thought this a great argument in their favour 
since if the prices fell, the new land could not 
be kept in cultivation, and then, they said, less 
corn would be produced and its price would 
rise again. To this Malthus, Ricardo, and a 
much less well known but excellent writer, Sir 
Edward West, all replied in effect that the 



recent rise of price was the result of the new 
land being worse than the old, and that if some 
corn were imported, cultivation could be con- 
fined to better land on which the cost of pro- 
duction and the price would be lower, so that 
the effect of allowing importation would be to 
lower rather than to raise the price. 

To explain their thesis both Ricardo and 
West wrote brief imaginary histories of the 
progress of cultivation, illustrated with 
numerical examples, in which they supposed 
the most fertile and best -situated land to be 
taken into cultivation first and then the less 
and less good in regular succession as popula- 
tion increased and required larger and larger 
supplies. They recognized that the larger sup- 
plies could also be obtained by employing more 
labour on the old land, but whether they were 
obtained by labour on the new land or by addi- 
tional labour on the old or, as would happen in 
practice, partly by one method and partly by 
the other, the returns to a given amount of 
agricultural industry would be diminished. 
West says : — 

" The . . . principle ... is that each 
equal additional quantity of work bestowed upon 
agriculture yields an actually diminished return, 
and, of course, if each equal additional quantity 
of work yields an actually diminished return, 
the whole of the work bestowed on agriculture 
. . . yields an actually diminished propor- 
tionate return. Whereas it is obvious that an 
equal quantity of work will always fabricate 
the same quantity of manufacturers." 

This *' principle " of West's received the 
rather unfortunate title of " the law of 
diminishing returns in agriculture." The 



diminution of returns, it was seen, might be 
prevented from actually taking place by what 
were called " improvements,'^ that is to saj, 
inventions and the introduction of better 
methods, but it was supposed that the effect 
of these changes was merely temporary, and 
could not prevail in the long run agamst the 
general principle, so that diminishmg returns 
was the general rule throughout history. This 
is so contrary to the results of direct observa- 
tion that it seems difficult to believe that it 
could ever have been accepted, but it was 
supported by the erroneous theory of prohts 
generally held at the time, which led 
people to suppose that the historical fall in 
the general rate of interest which had taken 
place was a proof of diminution of returns. 
The doctrine of 1814 that growth of popula- 
tion produces a " tendency," in the sense of a 
general drift only temporarily interrupted by 
*• improvements," towards a diminution of the 
returns to a given amount of industry expended 
in agriculture was not a " law " at all, but a 
hasty and erroneous generalization founded 
on observations made in an exceptional period 
of English history. When the memory of that 
gloomy period began to fade away, writers 
began to point out that, as a matter of fact, 
in spite of the great increase of population, 
the returns to agricultural industry had, in the 
general course of history, increased enormously. 
One of them says :— 

■ " In 1389, in securing the crop of corn from 
200 acres, there were employed 250 reapers 
and thatchers on one day and 200 on another. 
On another day in the same year 212 were 
hired for one day to cut and tie up i 3 acres of 


wheat and i acre of oats. At that time 12 
bushels to an acre were considered an average 
crop, so that 212 persons were employed to 
harvest 168 bushels of grain, an operation 
which could be accomplished with ease in our 
time by half a dozen persons." 

Statistics of this kind are difficult to obtain, 
and not always trustworthy, but no reasonable 
person can have any doubt that the productive- 
ness of agricultural industry has enormously 
increased. The population of the civilized 
world is much better fed, and yet has to spend 
far less a proportion of the whole of its labour 
on the acquisition of food. If agricultural 
returns diminished, and yet the people con- 
tinued to be equally well fed, a larger and ever 
larger proportion of the world's labour would 
clearly have to be expended in producing food. 

When no longer able to ignore the historical 
increase of returns to agriculture, those who 
were determined to take a gloomy view of the 
effects of growth of population shifted their 
ground by saying that they did not mean that 
it caused a tendency to diminution of returns 
in the sense of a general drift, subject only to 
temporary interruptions, towards diminution of 
returns, but that it tended to diminish returns 
in the sense of causing the returns to be less 
than they otherwise would be. The growth of 
population, it was supposed, always tended to 
diminish agricukural returns, although " im- 
provements " or, as J. S. Mill said, " the pro- 
gress of civiHzation," had in the course of 
history more than counteracted this force, so 
that though returns had actually increased, they 
would have been still greater if population 
had not increased. 






This is clearly untrue if it is applied to the 
whole history of mankind. It would be absurd 
to contend that the productiveness ot agri- 
cultural industry would be greater now than it 
actually is if the population of the world had 
remained at two, or whatever other small hgure 
we suppose it to have started from. ihe 
♦' improvements " which have taken place would 
certainly not have been discovered and intro- 
duced if the population had remained so small. 
But if the doctrine is applied, as Mill seems 
to have meant to apply it, only to fairly recent 
times it does not appear to be possible either 
to prove or disprove it. Mill coolly assumed 
that all the improvements which have been 
made would have been made just the same if 
the population had not grown. We cannot 
assume that, and we have no means of findmg 
out exactly what would liave been the position 
in that respect in Mill's time if the population 
of the world had remained at the same figure 
as it had reached in 1800, nor what would be 
the position now if the population had become 
stationary at the figure it had framed when 
Mill wrote in 1848 and which he considered 

great enough. . ... 

Of course the question of the desirabihty 
or undesirabiUty of increase of population 
cannot be settled entirely by its effect on the 
returns to agricultural industry. Man does not 
hve by bread alone, but requires all sorts of 
other commodities. The law of dimmishing 
returns was put forward as applicable only to 
aericuhure and other "extractive industries, 
such as mining, which were regarded as 
directlv dependent on the fertility of the soil. 
In other industry, especially manufacturing 


industry, it was supposed that division of labour 
led to increasing returns when larger quantities 
of produce were raised by increasing numbers 
of workers. 

Thus it had to be admitted that an increase 
of population, while tending to diminish returns 
from agricultural industry, at the same time 
tended to increase returns from manufacturing 
industry, so that a balance had to be struck 
between the effect of the two tendencies : the 
returns to all kinds of industry taken together 
would only diminish when the diminution in 
agriculture was great enough to outweigh the 
increase in manufactures. It seems difficult 
to believe that any one could have supposed 
that this was ordinarily the case, but the theory 
of profits already referred to required those 
who held it to think that a diminution of 
returns, at any rate in all the industry which 
produces things for the labouring classes, was 
proved by the historical fall of the rate of 
interest, and the practice of identifying wages 
with food which prevailed in the earlier part 
of the nineteenth century led to the weight 
of agriculture being grossly overestimated. 
Consequently it was held that increase, of 
population tended to diminish the returns to all 
kinds of industry taken as a whole, and the 
gloomier writers ,of the time believed that it 
had actually done so. 

What is .wanted now is to throw aside the 
sharp distinction which was drawn in 18 14 
between agriculture and manufactures. Turgot's 
law is just as true of manufactures as of agri- 
culture. At any given time (or if the reader 
prefers, circumstances remaining unchanged) in- 
crease of labour up to a certain point is attended 





by increasing proportionate returns (called for 
short increasing returns) and beyond that point 
further increase of labour is attended by 
diminishing proportionate returns (called tor 
short diminishing returns). Mankind cannot 
produce an unlimited amount of calico any 
more than an unlimited amount of wheat. It 
would be impossible to produce more than a 
certain amount, however many persons were 
engaged upon the production : and long betore 
that amount was reached, the amount of addi- 
tional calico which could be produced by each 
unit of additional labour would begin to 
diminish. At any given time, or, which comes 
to the same thing, knowledge and circumstances 
remaining the same, there is what may be 
called a point of maximum return, when the 
amount of labour is such that both .an increase 
and a decrease in it would diminish propor- 
tionate returns. It is a crude and barbarous 
idea of agrlcuhure which represents it as almost 
entirely dependent upon original fertility ot soil 
and footpounds of human muscular energy, and 
as scarcely affected at all by the world-wide 
co-operation of mankind which provides it with 
appropriate tools and suitable seed, and com- 
bines the products of different regions so as 
to make them wholesome or palatable to the 
consumer. The most we can say in contrasting 
agriculture and manufacture is that the advan- 
tages of producing a large aggregate quantity 
and therefore the advantages oF a large popula- 
tion to produce and consume the large quantity 
are more obvious in manufacture than in agri- 
cuhure. If we measure returns from the 
starting point of nil suggested by the historical 
progress of population and assumed by Alalthus, 



West, and Ricardo in 1 8 1 4, we can say that in 
both agriculture and manufacture returns in- 
crease up to a certain point, and beyond that 
point they decrease. If we start from what 
1 have called the point of maximum return, we 
can say of manufacture as well as of agriculture 
that returns diminish as we move in either 
direction from that point. 

If we suppose all difficulties about the 
measurement of the returns to all industries 
taken together to be somehow overcome, we 
can see that at any given time, or knowledge 
and circumstances remaining the same, just as 
there is a point of maximum return in each 
industry, so there must be in all industries 
taken together. If population is not large 
enough to bring all industry up to this point, 
returns will be less than they might be, and 
the remedy is increase of population ; if, on 
the other hand, population is so great that the 
point has been passed, returns are again .less 
than they might be, and the remedy is decrease 
of population. 

It is very important not to fall into the error 
of supposing that the point of maximum return 
remains permanently fixed, either for particular 
industries or for industry taken as a whole. 
The position of the point is perpetually being 
altered by the progress of knowledge and other 
changes. The discovery of the principle of 
rotation of crops and the invention of steam 
locomotion on rails, coupled with the provision 
of the requisite appliances, not only made in- 
crease of population possible without diminution 
of returns and consequent deterioration of 
wealth, but also made or tended to make that 
increase desirable. These changes shifted the 






point of maximum return, pushmg it farther 
along in the direction favourable to large 
population. Hence it is quite possible that 
the world was over -populated in some past age 
when there was not a tithe of the present 
number of people on the globe, and that ^U 
the same it is not over -populated now. In the 
meantime the point of maximum return may 
have been shifted. 

The course which the development ot theory 
on this subject has taken has led to the use 
of a great deal of very unsatisfactory phrase- 
ology which ought to be discarded once and 
for all. Writers have said that "the law of 
diminishing returns had not come into opera- 
tion " when they only meant that returns had 
not 'begun to diminish, and they have spoken 
of the law " undergoing a temporary super- 
session " when they meant only that returns 
had left off diminishing for a time. Ihey 
have talked of " commodities which obey the 
law of diminishing returns " when they meant 
commodities the supply of which could not at 
the moment be increased without a diminution 
of returns, and of " commodities which obey 
the law of increasing returns " when they meant 
commodities of which some increase of supply 
would be at the moment accompanied by in- 
creased returns. They have even imagined an 
intermediate class " obeying the law of constant 
returns " All these expressions involve mis- 
use of the term "law." A scientific law should 
be true at all times and places, and should not 
be hable* to " temporary supersessions or 
failures to come into operation, nor capable 
of being suddenly replaced by a contrary law. 
No one says that the law of gravity had not 


come into operation in regard to Newton's 
apple until it broke from its stalk, nor that the 
law would have undergone temporary super- 
session if Newton had caught the apple as it 
fell. Nor do we say that a falling balloon 
is " subject to the law of gravity," but a rising 
balloon is " subject to another law, that of 
rising bodies," while a balloon which remains 
at the same level is " subject to the law of 
constant height." 

If we take the point of maximum return as 
the starting-point, we can say that returns 
diminish in either direction, and that all com- 
modities or industries are always and every- 
where subject to this " law of diminishing 
returns." It is possible, however, that the 
misleading associations of the term make it 
desirable to adopt the suggestion of M. Gide 
by abandoning the term " diminishing returns " 
in favour of the neutral phrase, " non-propor- 
tional returns." 







We have seen how the material welfare or 
wealth of Isolated Man must depend on his 
original qualities, on the improvements he has 
effected in them and in his outward envirori- 
ment, and on his judgment and will m usmg his 
powers and environment. We have further seen 
that the wealth of Society depends on the same 
factors, and, in addition, on the completeness 
of co-operation and on the closeness ot popu- 
lation to the point at which it should be in order 
to give the best results. In order that the posi- 
tion of Society may be good in respect of all 
these conditions, it is necessary that Society 
should be well organized— that it should have 
suitable machinery for securing that the 
original powers of the people shall be great, 
that they and their surroundings shall be suffi- 
ciently improved, that co-operation shall be 
properly developed, that population shall 
approximate to the appropriate size, and that 
proper decisions shall be arrived at with regard 
to the amount and direction of the labour ot 

the people. , , . ^ 

Some would have us believe that there is at 

present no organization at all. They use hard 

words, such as " scramble for wealth, sui- 


cidal competition," " exploitation," " profit- 
hunting," and say that the present state of 
things is " chaotic." Now whatever our 
present state may be, however unsatisfactory it 
is, it is certainly not chaotic. If it were really 
chaotic, every one who goes to his daily work 
to-morrow must be a fool, since he would be 
just as likely to get his daily bread if he stayed 
at home or went elsewhere to amuse himself. 
The very fact that we know as well as we do 
that certain results will almost certainly follow 
upon a certain course of action shows that we 
are not living in chaos. Our system may be 
a bad system, but it is a system of some sort : 
it is not chaos. If a man holds a book too 
close to his nose, he cannot read it, and so it 
is with the world of industry. If we look at 
it from too close a standpoint we can only see 
a blur. Gladstone complained that Bonamy 
Price proposed to legislate for Ireland as if 
he were legislating for the inhabitants of 
Jupiter or Saturn, and this has given rise to 
the saying that " Gladstone banished political 
economy to Saturn." Let us adopt the sugges- 
tion conveyed in Gladstone's metaphor and 
imagine a committee of the Economics Section 
of the Saturnian Association for the Adva;nce- 
ment of Science reporting on what they had 
been able to see of affairs on our planet through 
a gigantic telescope big enough for them to see 
human beings moving on its face. Would 
they be likely to report that poor Mundus 
seemed quite chaotic ? Would they report that 
every one was scrambling for himself to the dis- 
advantage of every one else in such a way that 
the general good seemed entirely neglected? 
Would they say that all the land in the most 



convenient situations was lying idle, that 
nobody had a roof over his head, and that every 
one was running about aimlessly or sitting idle 
in imminent danger of starvation ? They migj^j 
report something of this kind if they could 
carry on a conversation with certain people 
here and believed all they were told, but cer- 
tainly not if they judged by their own 

They would be much more likely to report 
that they had seen a very orderly people co- 
operating on the whole with a wonderful 
absence of friction— that they had seen them 
come out of their homes in the morning in 
successive batches and wend their way by all 
sorts of means of locomotion to innumerable 
different kinds of work, all of which seemed 
to fit somehow into each other so that as a 
whole the vast population seemed to get fed 
and clothed, and sheltered. They would not, of 
course, vouch for the perfection of the arrange- 
ments.' They would see that there were occa- 
sional irregularities and hitches. They might 
see now and then too many vehicles in one 
street, too many passengers trying to travel by 
one train or tramcar. They might even see 
along our English country roads the melancholy 
spectacle of men tramping in both directions 
evidently in search of the same kind of work. 
They might be able to see that some had too 
j^uch— more than they seemed to know how to 
dispose of without hurting themselves and 
Qthers— while some evidently had too little for 
healthy and happy existence. But in spite of 
these defects, they would report, I think, that 
on the whole the machinery, whatever its exact 
nature, seemed to do its work fairly effectively. 



And if we can imagine them able to go back 
five hundred or a thousand years, we can feel 
tolerably sure that they would report still more 
favourably, since they would then see that 
enormous improvement had taken place and 
would discover no appearance of any change 
which would suggest that the existing system 
is not the outcome of an orderly development 
of the institutions of the past. 

I insist so strongly on the fact that our 
existing machinery does work, not with any 
idea of contending that all is for the best in 
the best of all possible worlds, but because I 
think that in order to get any proper hold of 
economics it is necessary to begin by consider- 
ing, not the defects of the machinery, but the 
main principles involved in its construction and 
working. We are apt to begin with the defects 
because it is they that strike our eye and often 
excite our sympathy. Seven per cent, of un- 
employed are much more likely to make us 
start thinking about economics than the other 
ninety-three who are in employment. The 
emaciated corpse of a single person starved 
to death naturally makes more impression on 
our minds than the comfortable bodies of a 
hundred thousand sufficiently fed citizens. But 
if we want thoroughly to understand the reason 
why work and food do not quite " go round," 
we should begin by endeavouring to discover 
what, after all, certainly does not explain itself 
—why they go as far round as they do. If we 
grant that there is an organization, the next 
question is, " What is it? " It is certainly not 
merely " the State." In modern times we 
become so accustomed to all institutions being 
defined and modified from time to time by the 





States within the jurisdiction of which they 
exist, that we are apt to regard them all as 
springing from the State and dependent upon 
its existence for their origin and development. 
But this is wrong. There are economic institu- 
tions which are older than the State, at any 
rate in the sense in which we use the word at 
the present day, and there are others which 
have come into being and developed under the 
ban rather than under the patronage of the 
State. Moreover, some of them cover the 
whole world, or at the least far wider areas 
than any State of the present or past. In deal- 
ing with the most important of the institutions 
on which our existing economic organization 
is based, it is most convenient to take the 
State as the third, the Family and Property 
being the first and second. 

We are sometimes inclined to talk as if the 
Family had been entirely superseded by the 
Individual in modern economic organization. 
This is a complete mistake, arising from forget- 
fulness of the fact that at least one-third of the 
population of the globe consists not of indivi- 
duals in the sense of independent adults, but of 
children regarded by older people as too young 
to be allowed to do what they like. It is true 
that the work actually done by children is not 
of much importance. The world would not 
suffer much in the next twelve months if 
all child-labour were entirely cut off for that 
period. But the children themselves are of 
paramount importance because it is from them 
only that the adults can be recruited, and for 
the most of mankind childhood is the period 
during which it is settled whether the person 
shall be industrious or idle and what he shall 

work at so far as he does work. By far the 
greater number of men and women have 
acquired the habit of industry because they 
were persuaded or driven to work by influences 
brought to bear on them by the Family when 
they were still children. These influences, of 
course, are multifarious ; some are typified by 
the kiss of the mother, some by the stick of 
the father ; some consist in the gibes of elder 
brothers and sisters, some in the appealing 
cries of hungry younger ones. Taken all to- 
gether, these family influences are so powerful 
that modern States find it necessary to make 
many regulations and employ many inspectors 
to prevent children from being overworked. 
How uniformly the habit of industry, once 
acquired in childhood, remains with the adult, 
is shown by the frequency with which we find 
ourselves attributing idleness in adults to the 
accidental absence of the normal family influ- 
ences. Within the Family, too, as a rule, is 
made the decision which governs the allotment 
of the person to some one profession or occu- 
pation. Every grown man or woman is doubt- 
less legally free to choose his or her occupation 
and to change it as often as he or she pleases, 
but legal freedom is generally not of much 
use after childhood is over. This might not 
make much difference if the parents always 
chose for the child just as the child would 
choose if it had experience before the choice 
took place. But that hypothesis is far from 
being a true one : the distribution of persons 
between the various occupations is influenced in 
the most important manner by the fact that 
parents often cannot, and often will not when 
they can, choose for their child the occupation 





which he would choose for himself if he were 
perfectly well-informed and capable of making 
the selection which seemed to him best in his 
own interests. 

To say that the Family regulates population 
looks at first more like a physiological truism 
than an economic proposition. But it is not 
to be denied that the economic solidarity of the 
family has an important influence on the 
number of births and the number of persons 
who survive childhood. What, however, the 
precise influence is, and how it works, is at 
present so obscure that it seems useless to 
attempt to elucidate it in a work like the 

We now proceed to the second of our three 
great economic institutions. Property. 1 do 
not say Individual Property, because a great 
deal of property is the property of groups of 
persons— groups of more or less magnitude 
from Nations downwards. 1 might say 
Separate Property, but that might mislead, as 
it is sometimes confused with individual pro- 
perty, and it is doubtful if there is much force 
in the word " separate," since if Mankind held 
everything jointly the idea of property would 
scarcely be needed. 

However far we try to carry our minds back, 
we can scarcely imagine a time when individual 
property in movable things was unknown. The 
very first beginnings of some sort of orderly 
society involve a recognition of the " right " 
of a person to retain the share of booty or 
produce which has been allotted to him either 
by mere circumstance or by some authoritative 
decision. As soon as weapons and tools begin 

to be used, it is inevitable that one person will 
be in the habit of using one and another person 
in the habit of using another weapon or tool, 
that each will resent any one else using what 
he has come to call *' his " weapon or '* his " 
tool, and that disinterested spectators will sym- 
pathize with him. We can see this exemplified 
in any nursery at the present time, and we can 
conjecture from the example of the nursery 
that the public sympathy and consequent 
general recognition of the " right " comes from 
a respect for custom, that is, from man's proper 
dislike for seeing things changed without good 
reason. The children can scarcely have been 
infected with the adults' ideas of property, since 
to the adults the whole of the things concerned 
appear to belong to the parent. 

The same feeling must have arisen with 
regard to dwelling-places as soon as man began 
to have any, and to pay som^ respect to order. 
A person who had secured a comfortable cave 
or lair under a bush for even a single night 
would be more annoyed if on returning the next 
night he found it fully occupied by some one 
else than if he had found another cave so 
occupied. If he had held it undisturbed for 
many nights, he would be still more incensed, 
and if any general respect for custom had 
grown up, he would be sure of the sympathy 
of the disinterested. It would of course make 
no difference whether the occupation was by an 
individual or by a family or larger group. 
Sympathy would be felt with the dispossessed 
group just as much as with the dispossessed 

The idea of property in Land does not appear 
to come quite so early. Primitive mankind 


was in much the same relation to the Land that 
mankind at present is in relation to the bea. 
The men were few, the land was big ; tne 
number of men using the land was not large 
enough to make them any appreciable incon- 
venience to one another. But when numbers 
grew, each group of human brings living 
together and in communication with each other 
beean to feel itself menaced by and therefore 
to resent the appearance of strangers in 
the district over which they were accustomed 
to roam, and which they had accustomed 
themselves to call " their " hunting grounds 
In regard to land, however, there was much 
less possibility of sympathy from disinterested 
persons than in regard to movables. 1 he dis- 
pute involved two whole groups, one of whicti 
was interested in making, and the other in 
resisting the invasion. Opinion outside these 
two groups would be distant (having regard o 
the facilities of communication) and probably 
ill-informed, especially if languages differed. 
Moreover, the causes of dispute were not so 
simple in themselves. There is not likely to be 
much difficulty in ordinary cases in deciding 
who is the person usuaUy in the habit of carry- 
ing a particular bow or spear or of occupying a 
particular cave or house. But there may easily 
be great difficulty in deciding whether one or 
another group is the one which usually hunts in 
some particular valley or on some particular 
mountain side. Quarrels were frequent and 
Tould only be settled by a trial of forces 
between the two interested groups If the 
victory of one side was decisive, it often led to 
some sort of incorporation of the vanqmshed 
which led to the amalgamation of the two 



territories into one, so that now a larger terri- 
tory would be held under one authority against 
all invaders. When two territories were amal- 
gamated into one, it would not necessarily or 
probably follow that the whole territory would 
be one property : much more often the old 
line, or a more accurately defined line, of 
demarcation would be preserved, or in some 
cases it would even happen that entirely new 
divisions of the territory might be made for its 
convenient use by several groups, each under 
a subordinate authority or in some way united 
together and divided from the rest. The land 
held by each of these groups is " theirs " in a 
somewhat different sense from that in which the 
land of all the groups now under one authority 
is '* theirs." It is their property, while the 
whole land is their country or territory. 

It was long before the difference between 
property in land and territory was grasped : it 
is scarcely grasped at the present time in many 
minds when acquisition of territory by a 
sovereign state is in question. But in practice 
the distinction has been recognized ever since 
conquest or other acquisition of territory ceased 
to carry with it the entire dispossession of the 
proprietors of the land annexed. 

•While the territories of small groups, de- 
fended only by force of arms against external 
aggression, were thus being transformed into 
their collective property, recognized by the 
governing authority of the larger territory of 
which they now formed a part, the idea of 
property in land was gaining strength in 
another direction owing to changes within the 
areas occupied by the small groups. The site 
of a house with some small curtilage must 


r ,Jfl(9t»l;sl^WMar-3»F"*^ 




necessarily be subject to the same ideas as the 
house Itself so far L the " right " to und.sturbcd 
occupation is concerned. It is practically dilh- 
cult to ditTerentiate the house and its site, ao 
people early began to regard the homesteads 
as ^'theirs" and to be supported by the 
authority of the group in mamtaining their 
position not only against outsiders but even 
against other members of the same group. But 
af first there could be no similar ideas with 
regard to the rest of the land of the group ; 
land being plentiful and men few, a single 
person or ^family would not be likely to claim 
a particular stretch of land as land which it 
had occupied, and which, therefore, should not 
be touched by others. In search of game every 
man would desire to roam over the whole of 
the land wherever the quarry happened o take 
him. So, too, pastoral people would turn out 
their flocks and herds with the idea that they 
should all be able to go where they would in 
search of pasture. Even arable cultivation 
could be carried on in common by groups 
consisting of a moderate number of persons 
without any very difficult problems of organiza- 
tion being encountered. As time went on 
however, it was found practically convenient 
to allow permanem occupation of plots of land 
for arable purposes by individuals and their 
heirs, and eventually even the pasture was 
divided up with the small exceptions which 
v.e see in Vhe " commons " of the pres^ent day.« 
The institution of property, whether indi- 

. It is as yet impossible to sum up the iiislory of property in 
land eicept in a vague and tentative fasliion. How easily much 
hat was recently accepted may be attacked can be seen m 
Mr, Jan St. Lewinski's Origin of Property. 1913- 



vidual or ** group -al *' promoted material 
welfare both by preventing destructive actions 
and by making it the interest of people to 
perform productive actions. If we can imagine 
men existing and living in contiguity without 
property, we can see that without property the 
pursuit of individual self-interest and even the 
pursuit by groups of individuals of their joint 
interest must lead to destruction rather than 
production. Self-interest and the interest of 
the group would lead the individual or group 
to take the easiest means of satisfying their 
desires. They would simply take whatever they 
wanted wherever they found it, just when they 
wanted it. To take it beforehand would be of 
no use, since, proprietary rights being sup- 
posed non-existent, some one else might take 
It away again. The only way of making sure 
of anything would be to secure and consume 
it before any one else. Such a system or 
absence of system could only work tolerably 
where men were few, nature's useful products 
very abundant, and man's wants confined to 
game, fish, and a few other things requiring no 
preparation before use. In other circumstances 
it is clear that the endeavour of each person 
or each group to satisfy his or its desires in the 
shortest possible way must lead to disastrous 
results. If the game is not enormously plentiful 
it will be disastrously reduced and probably 
eventually exterminated by wasteful killing, 
especially in the breeding season. Unless the 
vegetable products which man wants are in 
enormous abundance, the desire of every man 
to make sure of them will lead to their being 
plucked before they are quite ripe, as is the 
case in the present day in our own country with 



blackberries growing by the roadside in the 
neighbourhood of towns. No one will make 
any provision for the future or prepare any 
materials for use or construct any tool or other 
appliance unless he can be quite sure of con- 
cealing his proceedings and his product from 
the eyes of his neighbours. 

Property being established, persons and 
groups find it to their interest to undertake all 
sorts of productive operations which would not 
be worth while if they could be interfered with 
by others. The proprietors of land (whether 
individuals or groups) can regulate the use 
of it so that as little waste as possible shall 

take place. 

At first sight, perhaps, property appears as 
rather a separating than a uniting force : it 
seems to set up separate interest and thus to 
divide the people. But as a matter of fact it 
unites them by compelling and facilitating their 
co-operation. It compels it, at any rate where 
there are any persons without enormous 
stretches of landed property, because small 
patches of land do not contain all the requisites 
of existence, and so if a person has only a 
small patch he must obtain some things from 
other people. If he has no land at all, it is 
still more obviously necessary that he should 
make terms with others in order to satisfy his 
needs. Property facilitates co-operation by 
making it depend upon innumerable separate 
agreements between individuals and groups of 
individuals instead of on decisions arrived at 
by Society at large, acting through some kind 
of world-wide authority. I say a world-wide 
authority because we must not forget that co- 
operation is at present world-wide. It is by 



no means to be regarded as a merely national 
affair. An immense amount of co-operation 
is carried on between the inhabitants of 
different countries with different sovereign 
governments. The nature of this co-operation 
is to be discovered chiefly in the returns of the 
various custom-houses, which reveal the kinds 
and quantities of goods imported and exported. 
We find that the people of England co-operate 
with the people of every other country in the 
world. The people of England somehow 
manage to agree with these other peoples so 
that a long list of exports is produced by the 
people of England for the use and consumption 
of the other peoples, who, in return, produce 
for the people of England the long list of 
imports. The co-operation by means of mere 
immediate exchange of goods for goods is 
evidently enormous, and often includes absolute 
necessaries of life, so that in its absence some 
of the countries would cease to be inhabited. 
Moreover, this simple immediate exchange of 
goods for goods is no longer the only kind of 
co-operation between the inhabitants of dif- 
ferent countries. It now often happens that 
the inhabitants of one country lend things to 
the inhabitants of another country, taking in 
return periodical payments in the produce of 
the second country. This loan of goods is as 
much entitled to be called co-operation as the 
immediate exchange of goods. Further, much 
co-operation between the inhabitants of 
different countries now takes place in the form 
of supervision or direction by persons residing 
in one country of productive operations carried 
on in another. 

The whole of this co-operation is dependent 

■ ■■■■w"S;5it^S?W*!S«'3f«>'e 


v i 


on the existence of the institution of property 
in the various countries concerned. 1 roperiy 
is by no means exactly the same m all its 
Qualities and incidents all over the globe. 
Diffcrem ideas prevail in dilYerent countries 
and are embodied in the laws and customs 
which are enforced by the various governments 
But there is sufficient similarity to make it 
possible for " business to be carried on with- 
out unpleasant surprises being too frequent. 

The State in its earliest manifestations 
appears, like the Family, as a group of per- 
sons : it was, in fact, scarcely more than a 
somewhat wider Family. Relics of this may 
still be found in the fact that parentage still 
often confers citizenship, wherever the child 
may happen to be born, and in the fact that 
States claim the allegiance of their subjects 
or '* citizens " even when the persons have lett 
the coumry in which the State is established. 
But except for such relics the modern State 
is completely territorialized. We have already 
noticecf the common origin of the ideas ot 
territory and property in land. The two ideas 
besin to become distinct as soon as groups ot 
persons are united under one authority in such 
a way that they have a common government 
without common land. It is only then that a 
distinction is necessary between land 
belonging to a group of persons and terri- 
tory " belonging to a wider group containing 
within it various groups owning different 
parcels of land. The wider group and the 
authority which governs it then become in- 
separably connected with the territory, and 
instead of " tribes," " peoples," or even na- 




tions," " countries," represented by " govern- 
ments " or " States " are spoken of as taking 
the imtiative in all sorts of ways. 

Before we try to unravel the part played by 
these countries or States in economic organi- 
zation, it will be well to insist on the fact that 
they are very numerous. It is very misleading 
to talk as if there was only one State in the 
world, and so to identify the State and Society. 
When we speak of " the Family," we do not 
mean to imply that there is only one family in 
the world : just so, when we speak of " the 
State " we need not imply that there is only 
one State in the world. Even little Europe 
is divided between about twenty sovereign 
States. There is no common authority to settle 
disputes between them, and they are not always 
capable of setting up a special authority to 
decide a particular dispute when it arises, and 
if they do manage to do this, there is nothing 
to prevent the decision of the special authority 
being disregarded, though it must be granted 
that such repudiation seldom takes place. Dis- 
putes are consequently often settled, or rather 
attempts are made to settle disputes, by 
violence, and destructive wars take place which 
certainly serve no useful purpose in the general 
economic organization of Society. Moreover, 
the possibility of war leads to the permanent 
establishment of military and naval forces 
during peace. Since wars have become less 
frequent and shorter in duration, the cost of 
maintaining these forces in time of peace has 
come to exceed enormously the cost of war 
itself. This is a very serious imperfection in 
the present organization of Society which 
should not be ignored. We should regard it 






as a very serious imperfection in the organiz- 
ation of a '* country " if it had no police, so 
that each person had to go about armed to the 
teeth and to fortify his house against burglars 
and other malefactors. The present condition 
of things as between different States is precisely 
similar, and should be regarded in the same 


Even apart from actual war and preparations 
for war the policy of States is often anti -social. 
General opinion holds in each country that the 
policy of the state should be " national," that 
is, should be directed towards the " good of 
the country " without regard to the good of 
" the foreigner " except in a very strictly 
limited sense which only excludes what are 
regarded as " barbarous " actions. It is, for 
example, no longer thought right to eat the 
foreigner, or even to reduce him to slavery, 
and States which insist on carrying national 
policy to such lengths sooner or later find 
themselves suppressed by some other State or 
combination of States. But to " tax the 
foreigner " for purposes which cannot possibly 
do him any good, and to prevent foreigners 
from peaceably settling in the country when 
they want to improve their condition, are con- 
sidered perfectly legitimate objects of national 
policy, although they may be ^nd are often 
admitted to be contrary to the good of the 
world at large. No one, so far as I know^ 
has ever contended that the pursuit of self- 
interest by individual States tends invariably 
to the common good of the whole. 

On the other hand, it is clear that the indi- 
vidual self-interest of separate States does lead 
to a considerable and valuable amount of co- 


operation between them, and that this amount 
is continually increasing. Common interest has 
led them to agree to extradite offenders against 
each others laws, to arrange for the world-wide 
transmission of letters and messages, to adopt 
joint systems for the encouragement of litera- 
ture and invention. 

Inside each country the position of the State 
is less equivocal. When not in the hands of 
a mere faction, its influence is always intended 
to be directed in favour of the organization 
which is best for the " people " or the 
" country " as a whole, and though it is often 
far from clear who the " people " are and what 
the *' good of the country " means, there is 
no doubt that on the whole, in spite of mis- 
takes and misapprehensions, the modern State 
plays a most important part in economic 

In the first place the existence of the State 
and the order enforced by it makes it possible 
for property to play the part in organiza- 
tion which we have already dealt with. We 
can perhaps conceive a state of things where 
the co-operation carried on under the influence 
of the institution of property might exist 
without any organized authority or government. 
The whole people might have so much respect 
for each other's rights, as established by 
custom, that no one would ever require to be 
restrained from invading the rights of another, 
even if that other was weaker than himself. 
But we do not suppose that such a state of 
things has ever been realized in the past nor 
that it is likely to be realized in the near future, 
and if we are right in this, it is clear that the 
State has been necessary in the past and is 



likely to continue to be so in the immediate 
future. Further, even in a society of perfectly 
just men it would be desirable to have some 
common authority to make changes when 
necessary. Otherwise progress would be ex- 
ceedingly slow, since it would have to be 
imperceptible. If fast enough to be perceptible, 
it would seem to violate custom and would, 
therefore, be tabooed, in the absence of 
machinery for discussing reasons and passing 
judgment on them. 

In the eighteenth century there grew up a 
school of thinkers who said to the governments 
of the time, " Laissez faire;' or " Let alone." 
The more philosophical among them were 
influenced by the cult of Nature prevalent at 
the time, thinking that certain institutions were 
Natural and therefore good, while others were 
artificial and bad. They wanted the institu- 
tions which they thought natural let alone and 
the others abolished. The practical men (from 
whom the phrase itself is said to have come) 
wanted certain institutions which they regarded 
as harmful abolished, and did not trouble them- 
selves to think of the others. The philosophers' 
ideas about Nature are now recognized as 
erroneous, their natural institutions being 
nothing but slight modiflcations of those of 
their own time. To the practical men, the 
precept " Laissez falre " never really meant 
" Leave everything alone," nor even " Leave 
all natural things alone," but simply "Leave 
alone certain things which I think ought to 
be left alone." The practical men got their 
way to a considerable extent, especially in 
England, and therefore it has become the 
fashion to speak of " the triumph of Laisser 



jaire'' of the *' Laisser faire period," and even 
of the supposed subsequent " Fall of Laisser 
faire.'' But there never was and never can be 
a State which practises laisser faire. The very 
establishment of a State negatives a policy of 
complete " Let alone." In primitive times the 
demand upon the authority which represents 
the rudimentary State is constantly for the en- 
forcement of " good old customs." When the 
State complies with the demand, it is not letting 
alone, but taking an active part in the enforce- 
ment of these customs, which might otherwise 
fall into disuse owing to violation by interested 
parties. Moreover, the enforcement of these 
customs, coupled, as it usually is, with neglect 
to enforce other old customs, involves a dis- 
crimination which is favourable to progress. 
It is only the customs which are felt to be 
good which are enforced, while the others are 
left to be violated by those who find it to their 
interest to violate them. Enforcement of good 
customs necessitates precise definition, and a 
good deal of amendment is possible and prob- 
able in the process. Consequently there was 
really a large amount of " State interference " 
even in periods when the State seemed to do 
nothing except reinforce the people's respect 
for custom. 

The general enforcement of law and order 
and the facilitation of necessary or desirable 
changes in that law and order, though perhaps 
the most vital, is by no means the only impor- 
tant function of the State in economic 
organization. Separate property in land has 
never completely covered the face of any con- 
siderable country. A network of narrow strips 
forming the means of communication is always 

r I 




found outside the limits of ordinary private 
property, either free to the use of all -comers 
or available to all on payment of some toll 
or due prescribed or limited m some way or 
other by the State. Without this reservation 
from private property any considerable amount 
of communication would appear to be impos- 
sible. A single proprietor of a large parcel 
of land usually finds it to his interest to provide 
roads and sometimes more elaborate means ot 
communication within the area, and it is 
obvious that a number of different proprietors 
would often do well to co -operate for the same 
purpose. On a very sm^l scale of _ course 
They often do, but the difficulties of volun 
tarv" co-operation on a large scale are 
enormous. The single proprietor who makes 
a road entirely for his own benefit gets the 
whole of that benefit and, provided the benefit 
Exceeds the cost, the amount of the benefit need 
not be accurately known or estimated. It, on 
the other hand a number of P^P^etors co- 
operate in making a road and adopt, as would 
seem natural, the principle that the cost must 
be^pportioned between them in proportions 
detemined by the relative benefits they ind.- 
vfdually obtain, the total of these benefits must 
be Drecisely estimated in order to allow the 
appEnmLt to be made. If the arrange- 
ment is that the cost shall be recovered from 
2e persons using the means of communication 
in proportion to the use they make of it, as 
usually happens when railways and canals are 
made difficulties arise about the charges which 
Xuld be made for different uses, e.g should 
a man who sends a ton of gold over the means 
of communication pay only as much as one 




who sends a ton of coal ? Further, if this 
plan is adopted, the owners whose land is taken 
for the purpose of constructing the means of 
communication must be paid for it, and the 
question arises how much they should be paid. 
If each is allowed to stand out for as much as 
he can get, the means of communication will 
never be made, since each will try to get more 
at the expense of the others. If this difficulty 
is overcome by some arrangement about the 
apportionment of the total price, and the 
highest possible price is obtained for the pro- 
perty taken as a whole, the cost of transport is 
likely to be raised to an undesirably high 
pitch. For example, if there were a range of 
hills with only one pass through them dividing 
two parts of a country which it was desirable 
to connect by a railway or canal, and the 
owners of the land in the pass were allowed 
to exact the highest possible price for the 
monopoly of transit through it, the cost of 
transit and transport would be higher than it 
would if there were no range of hills, or if 
there were many passes through them, and 
there seems to be no good reason for the 

Hence provision of the means of communica- 
tion has always been very largely in the hands 
of the State. The State resolves the difficulties 
not always precisely in the best conceivable 
manner, but in a rough and ready fashion which 
is vastly better than leaving them alone. It 
apportions cost according to some arbitrary 
standard which very roughly corresponds with 
benefit received, modified often by some con- 
sideration of ability to pay : it prescribes rates 
and charges, or at least maximum rates and 

. i 



i ' 

si '' 




charges, for particular uses of the means of 
communication; and when it takes the and 
required, or when it authorizes enterpr smg 
persons to take the land, it never adopts the 
principle that the full competitive price is to 
be dven but only "compensation, based on 
The value of the land for purposes other than 
that of being used for the new or improved 
means of communication. 

In modern times a number of other thmgs 
have grown up which resemble the means of 
communication in being spread over large areas 
in thin lines. Water, instead of being obtained 
from a well in each curtilage, or being earned 
a Tng distance in buckets from some natural 
source, is supplied through large P'Pf or an 
open aqueduct from some river or lake natura 
or artificial, to service-reservoirs in the neigh 
bourhood of a town, and from these it is dis- 
pensed by a ramification of smaller pipes into 
every house. House drainage is earned out 
Tn 7very similar way. The provision of gas 
and electric light is also very similar. The 
provision" f telegraphic and telephonic com^ 
munication requires the laying of a network 
of wires all over the face of the wor d. Very 
o ten the most convenient plan ,s to P ace these 
waterpipes and gaspipes and wires along the 
already existing roads or railways, but it is 
constantly necessary to acquire P"vate pro- 
perty for some part of the work. These things 
are very similar to roads, rai ways, and canals 
fn niany of their characteristics, and they are 
dealt with much in the same way . 

In providing or actively helping to provide 
these engineering works required by the pro- 
gress of invemion and the thicker population 





in modern times the State may be said to be 
arranging for a necessary supplement to the 
organization based on separate property. In 
other important functions it appears rather as 
supplementing the organization of the family. 
We can conceive a state of things where 
children were always sufficiently trained and 
educated by their parents, and where the sick, 
aged, and infirm were always properly taken 
care of by the members of the family who 
were strong and well. But the actual does not 
come up to the ideal. Owing to many obvious 
causes, the family does not always perfectly 
fulfil its functions in these respects. At first 
individual almsgiving or " charity " attempts 
to supply the deficiency with very unsatisfactory 
results. Crowds of lusty beggars wander from 
one religious house to another or terrify the 
lonely housewife by the roadside. Little 
children are maimed in order to excite compas- 
sion for their mutilators. Some kind of organi- 
zation covering the whole territory and armed 
with certain disciplinary powers becomes 
obviously necessary, and is supplied by the 
State ; badly as it works in its earlier forms 
it is never worse than the chaos which preceded 
it, and as time goes on it is gradually 





Isolated Man's activity would be governed 
directly by his wants : he would endeavour 
to produce just those things which he thought 
would best satisfy those wants. The same may 
be said of any society when it proceeds by 
way of authoritative direction to its members : 
when it says, for example, " Thou shalt repair 
the highway, giving three days' labour each 
year," it is endeavouring to satisfy its desire 
for good roads. Of course a vast quantity 
of the labour of mankind is still called forth 
and regulated directly by the wants of those 
who perform it. Taking the world as a whole, 
and not thinking merely of the north-western 
corner of the Eastern Hemisphere and the 
thinly peopled continents of America and 
Australia which have been colonized in recent 
centuries, we see that individual families still 
very largely provide their own individual food- 
supply by their own labour devoted directly to 
the purpose, and even in western Europe and 
its colonies quite a considerable proportion of 
the whole of the labour expended is that of 
women and girls engaged in household and 
nursing service which satisfies directly the wants 
of themselves and those to whom they are 

bound by affection or conventional family ties. 
A certain, though much smaller, amount of 
labour is compulsory labour ordered by terri- 
torial societies with a view of satisfying 
societary wants directly, and another, probably 
larger, portion is expended voluntarily by well- 
disposed persons with the view of benefiting 
societies directly. 

The same observations may be made about 
the use of the material instruments of pro- 
duction and enjoyment. Isolated Man, of 
course, would use them to satisfy his wants 
directly, and as things are, many of them are 
used directly to satisfy the wants of their 
owners, whether their owners are individuals or 
societies : a man may use his own spade to 
dig in his own ground, and may live in his own 
freehold house, and a society may enjoy its own 
club-house or its park. But under existing 
institutions in the parts of the world where this 
book is likely to be read, people work and 
allow their property to be used chiefly, not to 
satisfy their own wants directly, or because 
society orders them, but in order to get 


Of course no one wants money for its own 
sake : we want it because we can get the 
things and services which we want by paying 
it away again. Money is but the " medium 
of exchange" between the things or services 
which we give and the things or services which 
we ukimately get. Originally, we may sup- 
pose, all kinds of goods were " bartered for 
one another directly, but at a very ancient date 
it became customary for the particular kind 
of goods accepted as money to appear on one 
side of every exchange, so that, for example, 







instead of exdianging corn directly for armour 
a man would " sell " corn for money and 
'* buy " armour with the money. Barter is 
clumsy, because it is only easy when one 
man happens to meet another who has what he 
wants, and neither of the two think the other 
is making too good a bargain if the thuigs 
are exchanged. Common sense early sug- 
gested the desirability of the one party ofTermg 
the other some third commodity which could 
subsequently be exchanged for what the other 
party wanted. Particular commodities soon 
became pre-eminent for this purpose, and now 
two or three have entirely superseded all others. 
A commodity so used is called a " currency," 
because it "runs" or passes easily from hand 
to hand. Many different kinds of things have 
been used at different times and places, but 
what we call the " precious " metals, gold and 
silver, with some assistance from *' token- 
coins'" made of other metal, and from pieces of 
paper on which are written or printed promises 
to pay sums of gold or silver, are now the 
only important currency. In very early times 
it was found convenient to use metal which 
had been stamped in some way so as to indi- 
cate its fineness, and soon pieces of particular 
weight were stamped so as to save the taker 
the trouble of weighing as well as of assay- 
ing. The Romans called the stamped metal 
" moneta;' after the temple in which the 
stamping happened to take place, and we have 
the word in our " money," but when we think 
of the pieces of metal separately we call tliem 


We want money because the possession of 
money enables us to buy ** valuable " things 

and services, and so it is in the first place in 
order to get money that people produce valuable 
things or perform valuable services. 

The ways of securing money in exchange 
for valuable commodities and services in 
modern civilization are innumerable, but it is 
well to review briefly the chief types. 

The simplest of all, and probably the oldest, 
is that in which one person sells finished com- 
modities to the " consumer," which means here 
the person who proposes to use them for his 
own direct benefit or that of his family and 


Another equally simple but much more 
modern method is that of working for " wages " 
under the direction of the " consumer " of the 
service rendered, as, for example, persons 
usually do in "domestic service." I call it a 
modern method because in ancient condi- 
tions we do not find one person voluntarily 
engaging to put himself under the direction of 
another man and work for him in exchange 
for pay. If one man in such conditions works 
for another it is because he must : the relation- 
ship between the two is of master and servant 
in the old sense of the words, in which the 
master is one who commands and the servant 
one who has to serve whether he likes it or 
not. Nowadays the words are not much used, 
and where they are they have lost their old 
force. People work voluntarily for their 
*' employers " because their employers offer 
them inducements to do so : they enter into 
contracts of service of their own free will, the 
contracts are for short periods, and the penalty 
for breaking them is generally trifling. 

A third method appears when land, things 





affixed to land, or movable objects are lent for 
a payment agreed on. So far as ordmary 
movable objects are concerned, this method 
is doubtless of high antiquity. We can imagine 
that in very primitive conditions one man would 
say to another, " You can have my boat to-day, 
if you will give me ten fish," or it might be 
•* if you will give me half the fish you catch, 
and the substitution of money for fish in pay- 
ment is a mere detail. , . 

We can imagine it soon becoming convenient 
on some occasions to lend sums of money with 
which the borrower would purchase what he 
wanted ; instead of borrowing a boat and pay- 
ing ten pieces of silver a month for its hire, 
the would-b€ fisherman might borrow a 
hundred pieces, buy a boat with them,^ and 
pay five pieces a month for " interest (at 
60 per cent, per annum) on the money. The 
loan of money differs a litde from the loan 
of a boat, because the lender of the boat 
receives back the same boat, older and the 
worse for wear, while the lender of money 
receives back a hundred pieces of silver just 
as good as those he lent, and therefore we 
should expect the " hire " to be somewhat more 
than the " interest," but we should expect the two 
methods to yield in the end the same net return 
to the lender and to cost the borrower the same 
net amount. Though they are so nearly alike, 
however, a widespread prejudice used to con- 
demn the lending of money for interest, 
apparently because the fundamental similarity 
of the two methods was not seen, and it was 
consequently supposed to be more uncharitable 
to charge for the loan of *' barren " money 
than for the loan of a boat or anything else 



which could more easily be seen to be pro- 
ductive." It was long before the requirements 
of business overcame this prejudice in any part 
of the world, and it is still widely prevalent. 
The lending of land by the owner to persons 
who wish to cultivate it in exchange tor a 
payment voluntarily agreed upon is quite 
modern. The periodical P^y^^^^^^^^ • ,"^^^^^^ 
vating tenants which we call ' rent did not 
spring up as the result of voluntary contracts 
between free men. Some men were lords and 
others were "their men." The men at first 
served, and in later times paid rent to the 
lords, not because the "landlords, as we call 
them, "owned" the land and none could be 
9-ot on better terms, but because they were the 
lords' men and owed the lords services which 
they were not free to refuse. It is only when 
the cultivators become free to leave the land 
and go elsewhere that we find the relation 
between landlord and tenant commg to 
resemble the relation between lenders and 
borrowers of other kinds of property. 

In process of time, as population has in- 
creased and commerce extended, intermediaries 
have appeared between the ultimate con- 
sumer " of commodities and services on the 
one side and the persons whose labour or 
property is used to produce the commodities 
and services on the other side Particular 
persons devote themselves to undertaking the 
business of causing the commodities and ser- 
vices which they think the consumers will pay 
for to be produced. They "employ people 
to make the commodities or perforni the ser- 
vices at " wages " agreed upon, and sell the 
commodities and services to the consumers tor 




what they can get, taking the difference between 
their expenses and their receipts as their own 
" profit " or gain on the transaction. Their 
expenses often include payments to the owners 
of land, money, and other things which they 
have borrowed for the purposes of their busi- 
ness, but it is usual for them to have some 
property of their own with which to start the 
business, even if they borrow largely. With- 
out such property they obviously cannot 
*' undertake the risk " of the business in any 
real sense : they may start the business and 
carry it on, but it is at the risk of some other 
person or persons and not at their own risk, 
since, if the business turns out a failure, it will 
be these other persons who will suffer. 

When he thought of this property necessary 
for starting a business as a number of different 
things, such as cattle and agricultural imple- 
ments for a farmer, tools and wood for a 
carpenter, ships for an old-fashioned merchant, 
the Englishman called it the " stock " or 
" stock-in-trade " of the person undertaking 
the business, and if he was asked what his 
stock was, he replied with an enumeration of 
its various constituent parts. In simple condi- 
tions this is all that is required. But as soon 
as the stocks of different persons and even 
of the same person at different times begin to 
show great variation in kind, a money valua- 
tion of the stock is desirable for comparisons 
between one person's stock and that of another 
and even between the same person's stock at 
different times. This is particularly obvious 
when people club stocks together for the pur- 
pose of carrying on a business on a " joint 
stock." When they do that, they are compelled 



to devise some means of distmgmshmg the 
different '' shares " held in the busmess by the 
different partners. Even if the shares are 
brought in originally in ships or merchandise it 
is necessary to value these things before it is 
possible to say that, for exaniple, the two small 
ships brought in by A make his share one -third 
of the whole, while B, who contributed one 
much larger ship, is to own the other two- 
thirds. But ordinarily the original stock o 
the partnership or company will be bought 
in the first place with money contributed by 
the partners or members, and here it is sti 1 
more obviously the simplest course to credit 
each partner or member with a sum of money 
in the stock of the partnership or company, and 
it becomes convenient on many occasions to call 
the total of the sums so contributed the 
stock " of the partners or the company. It 
seems that before this practice was established 
in England, book-keeping on the Continent 
had introduced the foreign forms of the word 
*' capital " to indicate the sums of money con- 
tributed by each partner or member and the 
total of these sums. The extension of he 
use of the term to England was assisted by the 
fact that the total sum was the principal or 
capital stock of the partnership or company, 
the head or chief fund with which it started, 
in contrast with minor stocks or sub -divisions 
of stock for particular purposes and any other 
funds such as those which would eventually 
constitute profits. Whatever doubt there may 
be as to the early history of the term, it is 
certain that before the end of the seventeenth 
century it was in common use as the name ot the 
original stock of companies considered as a sum 






of money, and that gains were calculated as per- 
centages on it and profits were divided among 
the members in proportion to their shares 
in it. Individual business men adopted the 
term, and applied it to their own businesses, 
saying that their business had such and such 
a capital invested in it and that they were 
making such and such a percentage on that 

The present organization of industry is some- 
times described as capitalistic, and the term 
is quite properly applied, if all that is meant 
by it is that in our part of the world the greater 
part of industry and property is immediately 
controlled by persons and institutions whose 
object is to make a profit on their capital. In 
Western Europe and America it is certain that 
the majority of workers work as they are 
directed to work by persons and bodies of 
persons who employ them in order to make 
a profit by getting more than they pay for 
all expenses, and who reckon the profit as a 
percentage on their capital. The greater part 
of the property is also in the hands of such 
persons and institutions. But we are not to 
conclude from this that these persons and 
institutions exercise any really spontaneous 
control over mankind and the useful things 
upon the face of the earth. They are only 
intermediaries between the consumer on the 
one side and the persons whose work and 
property is necessary for production on the 
other. They can only get their profits in 
consequence of a careful attention to value 
which compels them to agree on the one side 
with the consumer with means, and on the other 
with the workers whom they employ and the 


owners whose property they use. Their profit 
is dependent on the price the consumer with 
means will give, and on the prices at which 
they can obtain the things and services neces- 
sary for the production. If the consumers for 
any reason choose to place a lower value on 
some commodity or service which is being 
produced by ** capitaUstic " methods, the 
profits fall off, and all or some of the persons, 
firms, or companies engaged in the trade are 
compelled, or at the least find it better, to reduce 
their output. And the same thing happens 
if on the other hand, the value of some of the 
necessary elements of the production rises : 
profits are reduced until the amount produced 
is cut down, so that a rise in its price takes 

place. . - -^ r 4. :^ 

Thus every one, including the capitalist, is 

governed by the desire of being able to produce 
commodities and services of high value. A 
man capable of several dilTerent kinds of work 
of equal pleasantness will take up that which 
-pays" him best. If he is well disposed 
toAvards his children and able to train them for 
several such different kinds of work he will 
train them for that kind which will pay 
best after allowing for the cost. It he has . 
property, he will devote it to the purpose which 
will "pay" best. Whether he works for a 
person who consumes for his own satisfaction 
what he produces, or for a person or firm or 
company which sells what he makes to the 
final consumer and wants to secure a proht, 
matters not. 

If there were no correspondence between the 
production of what is valuable and the pro- 

1 06 


duction of what is useful, this seeking after 
the production of what is valuable could not 
be expected to have good results for Society 
as a whole. Now for ages past people have 
been in the habit of contrasting value and 
usefulness, or, which is exactly the same thing, 
utility. The stock examples used to be water 
and diamonds. Water, it was said, is of very 
great use, but has no value, while diamonds 
are very valuable, but of very little use. The 
proposition was accepted too lightly. Clearly 
a great deal depends on circumstances. A 
lady in a ballroom who did not happen to be 
very thirsty would probably pronounce dia- 
monds a great deal more useful than water. 
The easy acceptance of the doctrine seems to 
come from the belief that the world could 
get on much better without diamonds than 
without water : yet people will give more for 
a quarter-ounce diamond than for millions of 
tons of water. Usefulness is taken to be the 
quality which satisfies our more elementary and 
corporal needs, and there is no doubt that the 
word is constantly used in that sense in ordinary 
conversation. But economists have been in- 
clined to give to usefulness, or at any rate 
to "utility," a somewhat different meaning, 
by making it signify capacity to satisfy any- 
one's desires, so that it would be wrong 
(using the word in their sense) to say that dia- 
monds, or even a poisonous drug which some 
people were ready to buy because it was pleasant 
for the moment though it was pernicious 
in the end, had no utility. If utility be taken 
in this sense, the contrast between it and value 
seems much less marked. We are no longer 
incUned to say that diamonds have little or 



no utility, since we have to admit that they 
satisfy a want— the desire for ornament— which 
is distinctly economic. But we still feel that 
there is a considerable contrast between value 
and utility when we reflect that a deficient 
harvest will sometimes bring in a greater 
aggregate price than a normal one. According 
to the often quoted estimate of Gregory King, 
a deficiency of 10 per cent, in the harvest ot 
wheat would raise the price of the bushel by 
30 per cent., so that the small harvest would 
sell in the aggregate for 17 per cent, more 
than the normal one. Surely, we may say, 
a 90 per cent, harvest cannot satisfy wants 
better, and thus have greater utility than 
a 100 per cent, one, so here is a plain contrast 
between value and utility? But when we 
remind ourselves that the value with which 
we commonly deal is the value of some 
small unit of the commodity in question 
and not the value of the whole of the 
commodity in the world at the moment or 
of the whole produced in a year, we begin 
to doubt the contrast again. A bushel of 
wheat is more valuable when the harvest is 
small than when it is big. Is it not also of 
greater utility ? At the first blush we may feel 
inclined to answer in the negative, because 
it supports fife just as much and no more. 
But is there no difference? When wheat is 
plentiful some will be used to feed cattle or 
pigs • it has even, it is said, sometimes been 
used for fuel, just as fish when caught in 
abnormal quantities have sometimes been used 
as manure. So the uses of the wheat, the kinds 
of wants satisfied by it, are not quite the same 
when it is plentiful as when it is scarce ; some 





of it goes to satisfy less important wants when 
it is plentifuL And even if the kinds of wants 
satisfied were the same— if, for example, wheat 
was never used for anything except the food 
of man, could we truly say that the utility of 
a bushel, its effectiveness in satisfying man's 
want, was quite the same when bushels were 
very plentiful as when they were very scarce? 
When they were very scarce, people, or at any 
rate some people, would have to stop eating 
earUer than they would in times of plenty. 
They could say without misusing language, 
" In these hard times every bushel is so useful." 
It would certainly be justifiable to say that 
when the harvest is small, every additional 
bushel is of greater utility than when it is 

lar 2re 

This train of thought suggested the use of a 
new term, " final utility," or " marginal 
utility," to indicate the utility of additions 
to the supply of a commodity available at any 
moment, or what comes to the same thing, the 
utility of any particular portion of the supply 
considered as something which may be sub- 
tracted. Jevons in a classical passage put it 

thus : — 

" We must now carefully discriminate between 
the total utility arising from any commodity and 
the utility attaching to any particular portion 
of it. Thus the total utility of the food we 
eat consists in maintaining life, and may be 
considered as infinitely great ; but if we were 
to subtract a tenth part from what we eat 
daily, our loss would be but slight. We should 
certainly not lose a tenth part of the whole 
utility of food to us. It might be doubtful 
whether we should suffer any harm at all. 

♦• Let us imagine the whole quantity of food 
which a person consumes on an average during 
Twenty-four hours to be divided into ten equal 
Darts If his food be reduced by the last part 
he will suffer but litde ; if a second tenth part 
be deficient, he will feel the want distinc ly , 
the subtraction of the third tenth part will be 
decidedly injurious; with every subsequen 
subtraction if a tenth part his suffering 
will be more and more serious, until at length 
he will be on the verge of starvation. Now, it 
we call each of the tenth parts an increment, 
the meaning of these facts is that each in- 
crement of food is less necessary, or possesses 
less utility, than the previous one. 

The utility of the small unit supposed to 
be added to or taken away from the whole 
supply of the commodity was called the tinal 
utility " of the commodity, because it may be 
supposed to be that of the final or last unit. 
But the word "last," if not the word final, 
often suggests the idea of last added ^\PT 
of t^me, and this is misleading The bushe 
garnered late in October is not the final bushel 
in Jevons's sense any more than those got in 
on the first of August. For this and perhaps 
other reasons, his term final ^^^ ^een 
dropped in favour of "marginal, and writers 
talk of " the marginal utility of wheat when 
they are thinking of the utility .which would be 
gained by the addition of a single bushel or 
fwh^Tch is the same thing) the utility which 
would be lost by the subtraction of a single 
bushel Sometimes it is said that the margina 
udlity"of wheat is the utility of the marginal 
bushel but this is apt to mislead by making 
the reader imagine that there is some particular 






bushel which he must pick out as the marginal 
bushel. Sometimes, no doubt, after the whole 
of a particular quantity of a commodity has 
been used, we can say that some particular 
part of it was used for the least important 
purpose. If, for example, we have only a small 
quantity of water per day, we will drink it 
all ; a little more, and we will use some for 
cooking ; more still, and we will wash our 
hands ; still more, and we will wash our face 
and neck ; yet more, and we will have a bath 
or wash the doorsteps ; and if this does not 
exhaust the supply, we may even water the 
garden or the dusty road. We may then say 
the water was used in that order and that the 
gallons expended on the road were the marginal 
gallons. But usually even this much is not 
possible. Every ounce of bread we eat, for 
example, is as marginal as any other : we 
cannot pick one out as the one which we 
should have dispensed with as the least useful, 
supposing our supply had been reduced by that 


Between marginal utility and value there is 
no contrast whatever. The less there is avail- 
able of any commodity the higher its value, 
and also the higher its marginal utility : with 
increase of quantity both fall together. But 
we should not jump to the conclusion that 
" value depends on marginal utility." If two 
cisterns are connected, the water in both will 
maintain the same level, but that does not make 
us say that the level in the second cistern 
" depends upon " the level in the first. This 
would obviously be no more true than that 
the level in the first cistern was dependent on 
the level in the second. Just in the same 

way, it is no more true that value depends 
on marginal utility than that marginal utility 
depends on value. It is true that if a commo- 
dity has a high marginal utility it will have a 
high value, but it is also true that if it has 
a high value it will have a high marginal 
utility. The two qualities go together and 
are joindy the result of a multitude of causes 
which it is hopeless to expect to summarize in 
one short phrase, unless it is something like 
" the magnitude of the supply of the commodity 
and the demand for it," which conveys nothing 
to the mind without lengthy and elaborate 
explanations of the terms used. 

The importance of the conception of mar- 
ginal utility is not to be looked for in any 
compendious formula professing to sum up 
the causes of variations in value, but in the 
light which it throws on the connection between 
wants and their satisfaction under a system 
in which production is regulated by changes of 
value. Before the idea of marginal utility 
was conceived, the fact of some connection 
was known, but its basis was not clearly seen. 
We can now see that it rests on the psycho- 
logical fact that a person wants additions to 
the quantity of any commodity or service sup- 
plied to him less and less as the quantity 
supplied increases. 

How does all this affect the question of the 
beneficence of the control which, as we have 
seen, is exercised by value? 

So long as we have to do with only a single 
person we may say that the coincidence between 
control by utility and control by value is com- 
plete. A single person, acting with proper 







judgment, distributes his expenditure between 
various commodities and services in such a way 
as to satisfy all his various wants, taken as a 
whole, as well as he can considering his aggre- 
gate means. If he finds that a shilling sub- 
tracted from his expenditure on beer or tobacco 
will cause a loss of satisfaction less than the 
gain of satisfaction which he will get by spend- 
ing a shilling more on tea or newspapers, he 
will make the transfer. So it is sometimes 
said that he arranges his expenditure in such 
a manner that " the last shilling " or the 
marginal shilling " will bring in equal satis- 
faction in every line of his expenditure ; but 
as this rather suggests that we can pick out 
some particular shilling in each hne as the 
•' last " or '' marginal " shilling, it is better to 
say that he arranges his expenditure so that 
no shilling could be better expended by being 
transferred from any line to some other line. 
If the supply in any one line becomes greater, 
he will reconsider the distribution of his means 
with the result that he will give less per unit 
than before for the commodity in question, be- 
cause, now that it is more plentiful, a little more 
or less of it makes less difference to him. In 
short, he will give more or less for the unit 
of a 'commodity according as he more or less 
wants his command over the commodity 
increased, or what comes to the same thing, 
not decreased. This means that, so far as his 
power goes, value will regulate production in 
the manner which will cause the greatest 
amount of utility, since there will be great 
encouragement to produce more where more 
is much desired and vice versa. 

The same thing is true where we have to deal 

with a number of persons with equal means and 
equal wants, so that if the community con- 
sisted of such persons, we could say that there 
was complete harmony between value and utility 
and that the variations of value caused produc- 
tion to be directed into precisely those channels 
which would be best for satisfying economic 


So, too, this harmony would exist where 
wants were unequal, if means were distributed 
unequally but exactly in proportion to wants. 
Then, too, expenditure would be so arranged 
that no shilling could be better expended by 
being transferred from one line to another, and 
there would be great encouragement to pro- 
duce more just where more was most wanted 
and little encouragement to produce more 
where more was least wanted. 

But in the world which we know wants are 
not equal, means are not equal, and means 
are not distributed in proportion to the un- 
equal wants. Some persons with very great 
wants have little or no means and other persons 
with comparatively small wants have very great 
means. The wants of those who have sniall 
means do not count for so much in settling 
values as the wants of those who have large 
means. Consequently the fact that two things 
are of equal value does not prove that addi- 
tional supplies of each would satisfy the world 
equally. A gallon of milk and a gallon of 
petrol may be of approximately the same value 
without its being true that a million gallons of 
petrol added to the petrol supply would satisfy 
mankind just as much as a million gallons 
added to the milk supply. In actual fact the 
additional milk would for the most part go to 


. I 




satisfy the wants of a class with less means 
than the class which would consume most ot 
the petrol, and it would therefore satisfy more 
urgent wants, as, on the average, the wants ot 
those with small means are less completely 
satisfied than the wants of those with large 

means. , , , 

It is therefore, not true that when people 
work, or allow their property to be used, in 
order to obtain money from other persons, 
they are governed by men's wants in the same 
sense and as completely as when they work or 
use their property for their own direct beneht 
or that of their family or friends. They are 
really governed only by the wants of those 
who have abiUty to pay. To use the short 
expression which is found useful in common 
life, they are governed by " demand. 

The word " demand " implies a want on the 
part of the person demanding, and therefore 
at first sight the etfort to satisfy demand looks 
identical with the etfort to satisfy wants : no 
one will demand a thing unless he wants it. 
But the word also implies a power and a 
willingness— of course often enough a very 
reluctant willingness, but still a willmgness- 
to give something in exchange. I may want 
a motor-car in the sense that I wou d glad y 
accept one from any philanthropist who would 
pav both the first cost and the expenses .ot 
running and garaging, but if there is no such 
philanthropist and I have not the slightest 
imention of purchasing a car with my own 
money, my want plays no part whatever in 
the "demand" for cars. This is simp e 
enough, but it is far from covering the whole 
of the ground. The people of the world are 



not divided into those who are willing to give 
an unlimited amount for an unlimited number 
of cars, and those who will not give anything 
at all for a single car, however small its original 
and working cost. The actual state of things 
is that at one price a certain number of cars 
will be sold, at a higher price fewer will be 
sold, and at a lower price more will be sold. 
With this in our minds let us ask ourselves 
what we mean by the demand for cars. It 
seems to be the want for cars coupled with the 
willingness (of course largely dependent on 
ability) to pay more or less for them. So 
when we talk of " satisfying demand/' all that 
we mean is supplying people who want and 

will pay. 

Accuracy of thought and expression about 
demand and its effects can be assisted by the 
use of the technical terms " elastic " and " in- 
elastic " or " rigid," applied to two different 
qualities of demand by most economists at the 
present time. The demand for a commodity is 
said to be elastic when a small fall of price 
would cause the amount sold to increase by a 
large percentage. This use of the term was 
probably suggested by the Budget speeches 
of Chancellors of the Exchequer in the second 
half of the nineteenth century : when they had 
reduced the duty on some article and then 
found the revenue nearly as large as or larger 
than before, they used to congratulate them- 
selves on " the elasticity of the revenue " from 
this article, the idea being of course that the 
consumption was repressed by the duty, and, 
when the weight of the duty was lessened, rose 
up like a lump of some elastic substance which 
has been squeezed down. If a small fall of 



price will cause the amount sold to increase by 
a large percentage, it is probable that a small 
rise of price will cause it to decrease by a 
large percentage, and so the demand is equally 
said to be elastic if this is the change actually 
observed. Contrariwise, if the fall in price 
will only cause a small increase in the 
quantity sold, and if the increase in price 
will only cause a small decrease in the 
quantity sold, the demand is usually said to be 
"inelastic." Cases are sometimes imagined 
rather than actually found, where an alteration 
of price would cause no difference in the 
amount sold, and the demand is then said to be 
"absolutely inelastic" or "quite rigid." 

It is of course a commonplace that traders 
are governed by demand. If a commodity is 
not demanded at all, they soon cease to offer it. 
If they find that there is, or think that there is 
going to be a " greater demand," meaning by 
that phrase used in this connection that it will 
be possible to sell more at the existing prices 
per week or per annum, they will offer more, 
provided they can get more at the same cost as 
before. If their business pays them under the 
existing circumstances, it will pay them, or at 
any rate some of them, to enlarge their business 
provided prices and costs remain the same. 
This very simple case only occurs by way of a 
rare coincidence. In a usual way the cost of 
producing a unit of the commodity will either 
rise or fall in consequence of an enlargement 
of the quantity produced. Then the elasticity 
of the demand comes into play. 

If the cost rises with enlargement of the 
quantity produced, " increased demand must 
be checked by a rise of price." This means 



that there will not be as much sold as could 
be sold if the old price had been charged: 
exactly how much more than before will be 
sold, and what exactly the rise of price will be 
and exactly how much more than before will 
be sold depends upon the elasticity of demand 
and the rate at which the cost rises with in- 
creased production. If the demand (after the 
change described as an increase of demand) 
is very elastic, and the rate at which cost rises 
with increased production is high, the increase 
of demand will be so " sharply checked by the 
rise of price " that the increase of quantity pro- 
duced and sold will be small. If, on the other 
hand, the demand is not highly elastic but 
inclining towards rigidity, and the rate at which 
cost rises with increased production is low, the 
increase of demand will not be sharply checked 
and nearly as much will be produced and 
sold as if the price had remained stationary. 

In the contrary case, where increased pro- 
duction lowers the cost of the commodity per 
unit the " increase of demand " will not be 
checked by a rise of price, but will be " stimu- 
lated by a fall of price." More being called 
for at the old price, those who sell to the 
demanders will each try to enlarge their 
business and others will enter the trade, and 
they will together eventually offer more than 
can be sold at the old price : prices fall and 
more is sold. Exactly how much more, and 
exactly at what price, depends upon the elasti- 
city of demand and the rate at which increased 
production lowers cost. If demand is very 
elastic and the rate at which increased produc- 
tion lowers cost is high, the additional quantity 
will be enormous, and the reduction of price 



great. If, on the other hand, the demand is 
not highly elastic, and the rate at which 
increased production lowers cost is low, the 
increase of quantity sold will be small. 

Of course changes in prices do not all 
originate in changes in the minds or the means 
of consumers. They may also arise from 
changes in the conditions of supply. Climatic 
or other natural phenomena may treat a 
particular kind of production more or less 
kindly ; improved methods may be discovered 
which make production easier ; more or fewer 
persons may be, for innumerable reasons, 
obtainable at higher or lower wages for parti- 
cular kinds of work : more or less land and 
other instruments of production suitable for par- 
ticular purposes may be available. But how far 
such changes affect the amount offered on the 
market will always depend on the elasticity of 
demand. The Isolated Man would be influ- 
enced in settling the distribution of his time 
between various classes of work by the causes 
which make different kinds of products easier 
or more difficult to procure, but this would not 
prevent us from saying that the distribution of 
his time was governed by his wants. In the 
same way, the fact that the amount of different 
commodities produced in a society like ours 
is affected by the conditions of supply need 
not prevent us from saying that in such a 
society production is governed by demand. 

We must not forget that a considerable por- 
tion of demand is furnished not by individuals 
but by institutions, private and public. When 
these institutions are supported by the voluntary 
contributions of living persons their demand 
does not amount to more than that of indivi- 


duals in combination, and needs "O JPfifl 
remark. But many institutions are abe to 
demand not in consequence of the conunue^ 
action of living persons who can ^o"tJ°l *^^ 
by cutting off their subscriptions if they ^re 
dissatisfied, but in consequence of dispos^^^ 
made by persons no longer living. When these 
Sositions become very flagrantly obnoxious 
to'^the common weal, or . to the sentiment, 
relieious or moral, of the time, they are inter - 
f^reTwith by the State in the territory of which 
thev happen to operate, but in spite of this 
ultimate check, a considerable amount of money 
"s always being spent under the trusts created 
bv deceased persons in ways in which it would 
not be spent if it was either the property 
of living individuals or of the State. . . 

The States themselves with their subdivisions 
exercise a large power of demand. According 
"o democratic Aeory they should exercise it as 
directed by the people, but the people are very 
variously defined by franchise and registration 
laws, and their power to direct their government 
is in fact seldom very effective so that State 
action is not actually, even in the most demo- 
cratic countries, merely the joint action of a 
number of people living on a certain territory. 





In the preceding chapter, in order to prevent 
the main argument being obscured by detail, 
I have ignored the fact that demand may be 
either for commodities and services which are 
wanted at once for immediate ends or for things 
which are wanted because they will improve 
people's position in the future. 

We have seen that our supposititious Isolated 
Man would have to be constantly deciding 
between action which gives immediate results 
and action which improves his position in the 
more distant future, and that his decision would 
be governed by rough estimates of the urgency 
of present as compared with future wants and of 
the technical advantages to be obtained in the 
long run by adopting methods which require 
effort to be put forth long before fruition 
instead of " hand-to-mouth " methods. We 
have seen, too, that Society has also by some 
means or other to make the same decision. 

Now Society as a whole certainly has neither 
mind nor machinery for making and carrying 
out such a decision on a straightforward esti- 
mate of the comparative urgency of present 
and future wants and the comparative technical 




advantage of the different methods of produc- 
tion. The decision is made for it by mdividuals 
and by public and private institutions, inclu- 
ding the territorial states and their subdivisions, 
in consequence of impulses derived from 
various motives. We see that while the bulk 
of the effort of Society is devoted to serving 
immediate ends, and in preventing the personal 
and the outward equipment of mankind from 
deteriorating, a considerable amount of effort 
is devoted to the improvement of this personal 
and outward equipment. We find that each 
generation teaches the next not only as much as 
it was taught itself but something more, so that 
each generation becomes better equipped with 
knowledge ; we find that each generation 
leaves the material surroundings of mankind 
not only as good as it found them, but some- 
what better, so that each generation is better 
equipped with tools and has easier access to 
raw material. We have to .ask ourselves 

"Why?" ^ ^ „ 

A certain considerable amount of the effort 
devoted to the increase of knowledge is due to 
a desire for the credit and renown gained by 
remarkable discovery, to the wish to benefit 
mankind or that part of it which belongs to a 
particular race or country, and to the natural 
itch to discover things which affects every 
healthy-minded person from his earliest child- 
hood. A portion of the effort devoted to the 
improvement of material surroundings is due 
to the desire of individuals that they or their 
families shall enjoy the advantage of those very 
improvements in the future. I have, for 
example, constantly to decide whether to go 
on with books and papers in confusion or to 



devote time at once to putting them in order 
so as to save time in the future and the long 
run. Many things will affect my mind in 
making the decision. A change in the extent 
of my knowledge may do so : I may become 
acquainted with the invention of the card cata- 
logue, and that may make it more worth while 
to catalogue the items : the weather may be 
very good, which will make it less worth while 
to give up leisure time at the present. So, too, 
every one who does his own gardening is con- 
stantly having to decide whether some little 
permanent improvement is worth while or not. 
Wherever large numbers of people live to a 
considerable extent upon the produce of their 
own and their family's exertions in agriculture, 
these direct decisions amount in all to some- 
thing of considerable importance. Where a 
state exacts compulsory labour from its subjects, 
as was the custom with regard to road-making 
even in Europe till quite recent times, it rests 
with the State to decide how much of this 
labour shall be devoted to immediate and how 
much to distant ends : the State can direct per- 
manent improvements to be made or abstain 
from doing so. 

But at present in our part of the world these 
cases are exceptional. As a rule when we see 
people producing things for storage, or building 
additional houses and factories, or improving 
land, or doing anything else which we believe 
likely to improve the position of mankind in 
the future rather than to satisfy its immediate 
wants, we do not think they are actuated by 
fear of the State, nor by the expectation that 
they or their families will themselves use the 
things they are producing, nor by philanthropy 



or patriotism. We know that they do this 
particular work simply because it pays theni 
to do it. Demand governs the distribution ot 
effort between the production of goods for the 
present and goods for the future just as it 
governs the distribution of effort between 
different kinds of goods for the present. If 
demand varies in one direction, a larger pro- 
portion of the whole effort of Society will be 
devoted to present goods and vice versa. What 
is true of labour is also true of the devotion of 
property to different kinds of purposes. If 
demand varies in favour of present goods, there 
will be more parks and fewer brickfields, more 
yachts and excursion steamers and fewer tramp 
steamers carrying iron ore and other materials 
for future constructions. At any one time there 
is a particular distribution of resources between 
nearer and more distant ends which is governed 
by demand, and what we want to know is what 
will cause the demand to be varied so as to vary 
this distribution. , . . 

The principal immediate cause is variation 
in the proportions between what we colloquially 
call " saving " and " spending." 

The term saving is ordinarily applied exclu- 
sively to money. We speak of " saving 
money" and "saving £100 a year." The 
money thus spoken of as " saved " might have 
been spent on current satisfactions and enjoy- 
ments, but has instead been reserved, with the 
effect of improving the outlook of the saver for 
the future. A person may have saved simply 
with the view of postponing the spending till 
some future period, when a given sum of money 
will, as he reckons, give him, or possibly his 
widow or children, something more worth 



having than what he can buy for himself or 
his wife and children at the present moment. 
Saving of this kind takes place in primitive 
conditions when a man puts away coin in a 
stocking or in a hole in his thatch in order that 
he may bring it out again to spend when he is 
old or sick and consequently unable to work ; 
under more modern conditions it appears when 
people deposit money in savings banks or pay 
life-insurance premiums not because the savings 
banks pay a small interest or because interest 
accumulates on the insurance premiums, but 
simply because they think it well to make pro- 
vision for times when they or their families will 
be more benefited by the expenditure of the 
money than they would be if the money were 
spent at once in addition to what is actually 
being spent upon them. It is thus true that a 
certain amount of saving takes place which is 
not caused by the existence of interest, and 
some economists have pronounced that a little 
saving might still take place even if the rate of 
interest sank to zero. But it must be borne in 
mind that such saving is only intended to be 
temporary : the savers intend what they save 
to be spent again, and that at no very remote 
date, and if their intention is not frustrated by 
accident, all that they save will be spent within 
a very moderate period of years, eighty or so 
at the outside, and usually much less. Conse- 
quently no very considerable accumulation 
could take place if there were no other motive 
for saving than the desire to " provide for a 
rainy day " by collecting a store of money 
which should be spent on the occurrence of the 

" rainy day.*' . r • • 

The most powerful motive for saving is 


supplied at present by the interest profit, or 
rent which can be obtained by it. People who 
are primarily induced to save by the desire 
to provide for a rainy day are encouraged to 
persist in their resolve and induced to increase 
their savings by the fact that they can get 
interest so long as the capital remains intact 
and others are induced to save in the first place 
because they see that it would be pleasmg to 
receive interest, profit, or rent while retaining 
the power of spending the savings if they 
choose at any moment to give up the interest, 
profit, or rent. " Interest " is obtained when 
the "money saved" is lent out on condition 
of the borrower paying periodically a sum 
called the " interest," and usually calculated as 
a percentage on the amount lent, which per- 
centage is spoken of as " the rate of m erest 
and in modern times is usually calculated per 
annum rather than per month or per week 
♦' Profit " is spoken of when the money saved 
is expended on the purchase of commodities 
and services which are subsequently sold tor 
more than their cost, and thus bring in a profit 
or Rain : this gain, too, is usually calculated 
as a percentage, but confusion sometimes occurs 
in consequence of the facts that the amount 
expended may be regarded as a whole or in 
parts and that the gain may come in at more 
or less frequent intervals. For example it 
mieht be said that a secondhand bookseller 
wat making a profit of 60 per cent, when the 
speaker was thinking simp y of the difference 
between the price at which he bought books 
and that at which he sold them, and only 20 per 
cent when the speaker was thinking ot the 
whole amount the bookseller had put into the 


business and the return upon that amount per 
annum. '* Rent " is obtained when the money 
saved is devoted to the purchase of land which 
is let for periodical payments agreed on 
between lender and borrower, or, as it is com- 
monly expressed, between landlord and tenant 
or owner and lessee ; and it is also in common 
language said to be obtained when the money 
saved is spent in constructing or buying a 
house or some other fixed object which is let 
for similar periodical payments. It is not, 
however, the practice to speak of rent in per- 
centages. Instead of saying the land or the 
house yields 5 per cent., we say it yields, say, 
£100 a year. If we want to relate the yield 
to the money expended, we say it was bought 
at twenty years* purchase, meaning that the 
price was equal to twenty times the rent. But 
this phrase is perhaps becoming old-fashioned, 
and it is quite possible to say that the land or 
house yields 5 per cent, on the price paid for 
it. In any case, it is a question of phraseology, 
which does not affect the fact that people who 
acquire property which yields a " rent " are 
actuated by the same motives as those who use 
the money they have saved to procure interest 
or profit. Hence economists have found it 
convenient to use the term " interest " to cover 
the whole of the periodical " returns " to 

Of course interest is not always equally 
powerful in causing savings. Changes are 
possible which will cause any given rate of 
interest to become more stimulating or less 
stimulating to saving in two ways. 

I . A change may take place which will 
render the potential savers more desirous or 



less desirous of providing for the future as com- 
pared with the present, although their means 
of doing so and their knowledge of methods 

remain the same. 1 .. 

There is little reason to suppose that provi- 
dence " is always present in the same degree 
in the minds of potential savers. Writers and 
preachers are in the habit of assuming that 
people usually underestimate future goods as 
compared with present. There is little ground 
for the assumption : it is chiefly made by the 
well-to-do, who do not know what it is to be 
really pinched in the present. But the fact 
that the assumption is made, and that people are 
exhorted to be more " provident," while nobody 
thinks of retorting that a change is impossible, 
shows that it is generally believed that a change 
in this respect can take place, and here no 
doubt the general belief is correct. 

More important, perhaps, than the obscure 
psychological change suggested by the phrase 
" increasing providence," are the innumerable 
circumstances which, without any such change 
and without any change of means, may lead 
people to be more or less desirous of attempting 
to improve the future at the expense of the 
present. More or less certainty about the future 
is perhaps the most important of these circum- 
stances ; we might reasonably expect more to 
be saved where security prevailed than where 
the saver ran considerable risk of seeing some- 
body else enjoy the fruits of his saving. 
Another important factor is the degree in which 
wives and children are distributed between the 
potential savers : a man is more likely to wish 
to save for his widow and children than for 


It is very commonly believed that States can 
alter the total amount annually accumulated 
directly and very materially by the choice which 
they can make between taxes which " are paid 
out of " or " fall upon " income and those 
taxes which are paid out of or fall upon capital. 
This belief is founded on a misapprehension. 
Most actual taxes are supposed to be paid out 
of income, and the stock example of taxes 
supposed to be paid out of capital is the inherit- 
ance taxes, or death-duties as it has been the 
custom to call them in colloquial English ever 
since Gladstone applied that term to them. 
Obviously, the immediate payers of such taxes, 
usually the executors or administrators of the 
deceased, ordinarily pay them out of the pro- 
ceeds of a part of the property passing from the 
dead to the living. The money thus obtained 
is supplied by the purchasers of the property 
sold, and its ultimate source is the income of 
the purchasers, or, at any rate, of some persons 
somewhere who have income to invest. It is 
because these persons save that the State is able 
to get the money, and so it seems clear to the 
attackers of this kind of taxation that it is paid 
out of capital, which is to its discredit, inas- 
much as it is usually regarded as rather dis- 
creditable for a State, as for an individual, to 
live on its capital. 

But whether the State takes twenty millions 
a year from owners of property taken as a 
whole by taxing each of them a small percen- 
tage every year, or takes exactly the same sum 
from them by taxing each of them a much 
larger percentage every twenty or thirty years, 
or whenever any one of them dies, can scarcely 
make any very material difference in the long 



run. No one supposes that the small annual 
percentage must be paid out of capual : why 
should the larger every -thirty -years or on- 
occasion-of -death percentage be paid out ot 
capital? The annual tax dimmishes the avail- 
able income left to the owners and available 
for their spendings or savings, by twenty 
millions per annum, and the tax le^'>ed at 
certain or uncertain longer intervals does 

exactly the same. AXrf^rt 

Taxation does not work in such a direct 
crude manner as is supposed. But all tne 
same there is a difference between the effect 
upon saving of different kinds of taxes. The 

uncertainty of life may, fo^ .^a"^?^^', Tan 
death-duties " fall upon capital mo^-e /han an 
equivalent annual tax : as people usually think 
they will live longer than they do, they may 
as a rule, underestimate the nearness ot the 
payment, and consequently spend more and save 
less than they would under an annual tax 
Again, all taxation of property, whether capital 
or^ income is the standard of the tax, as com- 
pared with taxation of labour-income, must 
Lmewhat discourage saving. And even m the 
taxation of commodities, it is possible to d^s 
criminate against or in favour of . the saving 
person : taxation of tobacco and whisky is more 
fikely to hit the spendthrift and thus to be 
paid out of income than taxation of carpets or 

2 A change of means may take place which 
will 'make it easier to save. Any one can see 
That the offer of a given rate of interest wil 
induce rich people-people whose unsatisfied 
wants of the moment are not urgent—to save 
Urger absolute quantities of money than poor 





people. It is a commonplace that the savings 
of the numerous poor are a trifle compared to 
those of the small section of society which is 
rich. This is not because the poor are more 
" improvident " than the rich, but because they 
cannot afford to save so much. It would be a 
physical impossibility for them to save so 
much : they have not got the income. 

It may be more difficult to see that a given 
rate of interest will not only induce the rich to 
save more absolutely, but will also induce them 
to save more in proportion to their spendings 
than the poor. But take two men of similar 
disposition and, so far as possible, of similar 
circumstances (e.g., give them the same 
number of children) the one with £ioo a year 
and the other with £100,000, and consider how 
they will be influenced by an offer of 5 per 
cent, for all savings. If either of them saves in 
any year one-tenth of his income, he will find 
the income of himself and his heirs increased 
in all future years by one-twentieth of one- 
tenth, that is, by ^ per cent. Cutting off 
10 per cent, of the '* spendings " of this year, 
then, will in each case increase the income of 
all future years by ^ per cent., and at first sight 
it seems as if 5 per'^cent. interest should induce 
the two men to save equal proportions of their 
incomes. But this first impression is erroneous. 
The advantage of the additional ^ per cent, of 
income is really more to the rich man in pro- 
portion to the 10 per cent, of "spendings" 
forgone than it is to the poor man. It may 
be difficult to see this if we take a small saving 
like one -tenth, but if we enlarge the propor- 
tion to one-half, the truth becomes obvious. 
If a man had £50 per annum and a family to 


bring up, we should think him a lunatic if he 
insisted on saving £25 per annum : we cer- 
tainly should not pass that judgment on a 
man with £5,000 per annum who saved £2,500 
per annum. The fact is, that the utility of 
additional income declines less rapidly as 
incomes get bigger : or, which will seem 
perhaps more convincing, though it is the same 
thing, the utility of each pound of income rises 
more rapidly as the income decreases. Conse- 
quently any given rate of interest wiU stimulate 
saving more when people are rich than when 

they are poor. . 

But, given certain conditions of desire to 
provide for the future and of ability to save, 
the higher the rate of interest the greater the 
saving. This has been questioned on the 
ground that there are some people who are 
determined to save an amount which will bring 
in a certain income, and if the rate of interest 
is low, these people will save more than if it is 
high. The existence of such people may be 
doubted, and even if a few such exist, they 
cannot make much difference. If strong cases 
of difference in the rate of interest be taken, 
it will be obvious that their determination, 
however obstinate, will be of no avail. At 
5 per cent, a man need only save £150 per 
annum for thirty years in order to get an 
income of £500 per annum in perpetuity be- 
ginning with the thirty -first year. But if the 
rate of interest fell to 2^ per cent., then in 
order to secure that income he would have 
to save no less than £455 per annum, which, if 
his income was a small one, would certainly 
break his determination. Taking all potential 
savers together, there can be no reasonable 


doubt that the higher the rate of interest, other 
things being equal, the greater the savings. 

What then determines the rate of interest? 

In approaching this question the first thing 
to do is to disabuse our minds of the confusion 
engendered by the too literal acceptance of 
the colloquial phrase, " it will not pay," applied 
to proposed investments. Of course it is true 
that some proposed investments will not pay in 
the literal sense of the words : they will bring 
in no return at all, and the money invested in 
them will be wholly lost. " It will not pay " 
often means only *' it is not worth while to 
make this investment since there are others 
open which will give a better return." At any 
given moment every one knows that there is 
some rate of interest which is the lowest that 
need be taken, and investments which yield 
less than this as well as those which yield 
nothing at all are said not to pay. Between 
the investments which " pay " the current rate 
and those which would pay nothing at all, 
there is always an immense number known 
which would pay something between the current 
rate and nil. The whole of the known methods 
of applying savings to the acquisition of new 
stores and instruments of production, such as 
machinery for producing cotton goods, or 
instruments of direct enjoyment, such as 
theatres and houses, should be supposed 
arranged in order of profitableness, so that we 
see some over the profitable level of the 
moment, 4 per cent, or whatever it may be, 
and others at lower levels, 3 per cent., 2 per 
cent., I per cent., o per cent., and downwards 
if we like into the minus region. When this 
is done, we can see that the more savings there 


are to invest, the lower is the current rate— the 
rate which is regarded as making an mvest- 
ment " pay "—likely to fall. To be convmced 
of this we need only suppose the amount 
coming forward week by week for mvestment 
to be doubled. Will not many mvestments 
then be made which no one will now look at 
because they "will not pay"? Will not all 
existing property yieldmg fixed sunis per 
annum rise in capital-value, or number ot 
years' purchase, so that the rate of mtei-est 
obtained by any fresh investor m them will be 
reduced? Will not every owner of property 
which does not yield fixed sums, but is subject 
to the competition of property newly created 
out of savings, complain that profits are not 
what they used to be? 

The degree in which the rate of interest wi 
be afTected by a given quantity of sayings will 
depend upon the magnitude of the field ot em- 
ployment at each rate, just as the number ot 
inches by which a quart of water will raise the 
level of water in a basin will depend upon the 
contour of the sides of the basin ; there may 
be a small field between 4 and 3 per cent., a 
larger one between 3 and 2, and a much larger 
between 2 and i, in which case the rate would 
fall less and less rapidly with given additions 
to the amount saved : or there may be just the 
reverse, in which case the rate would fall more 
and more rapidly : or there may be a large 
field between 4 and 3, a small one between 
3 and 2, and a large one between 2 and i in 
which case the rate would first fall slowly, then 
fast, and then again slowly. 

This would be an end of the matter it all 
other changes except increase in savings could 

) 4 


be neglected. But there are several other 
important factors. 

Firstly, an increase in the numbers of the 
people works in the opposite direction to 
saving. The more people there are, the greater 
the value of any given instruments, whether of 
production or, like houses, of direct enjoyment, 
in proportion to given products of labour 
requiring less saving. It is easy to see that 
if the population of the Earth were suddenly 
doubled by an immigration from Mars unac- 
companied by any importation of capital or 
fresh knowledge, the rate of interest would 
rise enormously, owing to the urgency of the 
increased population's demand for all kinds of 
instruments. The unoccupied tield of invest- 
ment would completely alter, and instead of 
mvestments at 4 per cent, bcmg " profitable," 
perhaps 20 per cent, would be commonly ex- 
pected and obtained. The gradual increase of 
population which usually goes on in the world 
has, of course, exactly the same tendency, 
though its effect is not so striking. 

Secondly, knowledge is continually growing, 
and additions to knowledge often affect the 
relative advantage of producing by methods 
which involve much storage of consumable 
goods and much provision of instruments com- 
pared with the advantage of pr6ducing by 
methods which require little or no stores and 
instruments. The stock example of an addi- 
tion to knowledge of this kind is the invention 
of steam locomotion on iron rails. This pro- 
vided an enormous extension of the field of 
investment by showing people a way of invest- 
ing a large quantity of savings in constructing 
new level roads by means of cuttings, em- 


bankments, tunnels, and viaducts, which was 
before unknown, and therefore not adopted, 
although more profitable than other mvestments 
which were actually made. This new method 
being once pointed out, new savmgs of course 
went into railway construction mstead ot bemg 
put into other investments yieldmg less. It is 
sometimes assumed that all additions to know- 
ledge are like this invention, and thus all tend 
to raise the rate of interest. But this is a 
complete mistake. While some inventions 
increase the comparative advantage of working 
with stores and expensive instruments, other 
inventions diminish it. Any one can see that it 
instead of steam railways the wishing 
carpets " of children's tales had been actually 
'' invented," so that all that was required to 
transport persons and goods was a few yards 
of inexpensive textile fabric, the field for the 
investment of savings would have been reduced 
instead of being enlarged, and investment 
would have been driven further down in the 
scale of profitableness : it would have been un- 
necessary to build railways or to improve the 
existing machinery of transport. There are 
of course, no wishing carpets, and we are apt 
to think that invention in practice always takes 
the form of the discovery of means which 
require more elaborate machinery. ^^^^^ .1^, 
however, only because the inventions of which 
we are reminded are those which are called to 
mind by the presence of the elaborate 
machinery required to utilize them : the others, 
which have simplified processes and led to 
the disappearance of elaborate— or, as we 
ungratefully say, clumsy-machinery leave no 
visible trace and are soon forgotten. \ et they 


are obviously of great importance — for all we 
know of even greater importance than the other 
kind of invention. 

The question now arises how well Society is 
served by the aggregate decision about saving 
arrived at by individuals and institutions. 

At first sight it may appear as if this decision 
should be perfectly satisfactory. Every indi- 
vidual who saves does so just up to that point 
at which the rate of interest he gets makes it in 
his opinion, which is probably as good an 
arbiter as could be found, just worth his while. 
Why does A save £100 a year and B only £50? 
Because A thinks the future advantage which he 
expects to get by reserving each pound out- 
weighs the present advantage of spending each 
pound up to a total of £100 ; beyond that he 
does not go, because he reckons that it is not 
worth while to pinch himself in the present for 
the advantage obtainable in the future. B cal- 
culates in exactly the same way, but owing to 
some difference in his character, needs, or 
means, the point at which he finds it desirable 
to stop is reached at £50 instead of at £100. 
Each of them stops at the margin where the 
advantage of further saving is just equal to 
the advantage of further expenditure on im- 
mediate wants. Having this in mind we may 
say that here is another case of correspondence 
between value and marginal utility, since the 
rate of interest may be said to indicate the 
value of saving as compared with spending, 
since " 5 per cent." means that £100 down 
and £5 per annum are of equal value. But it 
must be remembered that the correspondence 
of marginal utility and value is only true of 
single persons or of persons exactly similar in 


circumstances and tastes. In fact, of course, the 
tastes and circumstances of different persons 
differ enormously. If we suppose each smgle 
person to have perfect judgment, we are justi- 
fied in saying that each person will be induced 
by rises and falls of the rate of interest to regu- 
late his saving so as to get the greatest possible 
Rood out of his means : he will save just up 
to the point where future advantage equals 
present loss, and no further. But as thmgs 
are it is not justifiable to say that Society 
saves just up to that point and no further, even 
if we suppose that taken all together the 
potential savers have perfect judgment. Ihe 
different means of the different persons make it 
unjustifiable. Obviously a society with institu- 
tions like our own would save quite ditlerent 
amounts if there were a very few enormously 
rich people and the bulk of the population was 
poor than if means were more equally distri- 
buted It is true that such a distribution of 
means would not result in too much saving 
under the actual conditions : that is to say, it 
would not be advisable to tell the rich to 
squander their means in riotous living. It is 
better that the multimillionaires should go on 
providing the world with new ships, factories, 
houses, and such -like things than that they 
should give more thirty -thousand pound ban- 
quets But it is true that such a distribution 
would result in more being saved than would 
be saved under more satisfactory conditions, 
in which what was taken off the annual amount 
saved went, say, to buy more milk for half -fed 
children. Here again then we find that there is 
a connection between value and utility and a 
conditional though imperfect harmony. 



Variation of the proportion between saving 
and " spending," though probably the principal, 
is not the only important cause of variation 
in the distribution of effort between the satis- 
faction of present needs and the improvement 
of the future position of Society. People are 
only said to " save " where the acquisition of 
property is possible. But much effort is ex- 
pended which tends to improve the condition of 
mankind in the future but does not involve the 
acquisition of property by individuals or by 
private or public institutions. A large por- 
tion of the effort spent on additions to the 
field of knowledge comes under this head. 
States have, it is true, tried to create in patents 
and copyrights a kind of property which would 
play the same part here that ordinary property 
m material things plays in regard to additions 
to useful material things. But neither patents 
nor copyrights go or can go very far in the 
promotion of additions to useful knowledge, 
even if made world-wide. Most useful investi- 
gation in this direction is carried on not in 
response to commercial demand, but from the 
motives suggested near the beginning of this 
chapter (p. 121). There is no reason to suppose 
any perfect harmony here. It is probable that 
much more effort might well be expended in the 
direction of increasing knowledge. If more 
was so expended, less would, of course, be left 
either for savings in the ordinary sense or for 
the satisfaction of the needs of the present, or 
perhaps for both purposes, but the advantage 
obtained from the greater knowledge would 
more than counterbalance this loss in the long 





In order that any person or institution niay be 
able to control production contmuously by 
means of demand, it is necessary that he or it 
should have a continuous supply ot money to 

^^Such a continuous supply is provided, not 
perhaps exclusively but at any rate principally 
bv " income," in the sense in which that word 
is ordinarily used. It is important for this and 
other reasons to have a thorough understand- 
ing of that sense. i, *' ir. 

Etymology does not help us much. in- 
come " is doubtless something coming in, but 
what? And what exactly do we mean by 
- coming in " ? I suppose that the unsophisti- 
cated person, if there is one in this day ot 
schoolmasters and newspapers, will say tnat 
what comes in is money. This is nearly but 
not quite true. We say that a man s mcome is 
£100 or £1,000, as the case may be, but the 
statement is not intended to convey more than 
that the incomes are reckoned at that value 
lUst as when we say that a person ' inherited 
a million" we may be perfectly well aware 
that what he actually inherited was not a million 





pounds in gold, notes, or any other form of 
currency, but lands, houses, shares in com- 
panies, and other things which were valued at 
a million pounds. In fact, however, in our 
own and similar countries where " income " 
and equivalent words are used, the greater part 
of most men's income in the ordinary sense 
ot the word does consist of money, not 
necessarily coins put into their hands, but either 
coin or some kind of written or printed order 
which enables them to receive coin if they 
want it. But in addition to this " money- 
income," there are some other incomings 
which are often, at any rate, valued in money 
and added, as a sum of money, to the money - 
income, to make up the whole income. 

One of these things is the advantage which a 
man gets from living in a house of his own 
instead of in one for which he has to pay rent. 
It is usual to add to such a man's money- 
income a sum of money equal to the net amount 
which could be obtained by letting the house 
to a tenant. It is common, too, though not 
so common, to add to the money-income of a 
farmer an estimate of the money-value of that 
part of the produce of the farm which he 
and his family consume. 

On the other hand, we seldom or never add 
to a man's money-income an estimate of the 
money-value of the good he gets from his own 
furniture or clothes, and, still less would we 
think of adding an estimate of the money- 
value of the various services which he and 
his wife and daughters render directly to 

Why this apparently " illogical " distinction? 

The question can only be answered by the 


help of a consideration of the purpose for 
which we want the statement of mcome. It 
asked why we include the annual value of a man s 
dwelling-house in his income if he happens 
to own it, we should probably say at the hrst 
blush, " Because it would be misleadmg to say 
that a man lessened his income if he sold 
stock and bought the house which he had 
previously been renting and contmued to live 
in it, and to say that he increased his 
income again when he went out of it into 
another and let it for a rent which he had to 
spend in paying the rent of his new dwelling. 
The suggestion which we should obscurely 
imply in the word " misleading " is that we use 
calculations of income for the purpose of com- 
paring the spending power of one individual 
man with that of others, or his spending power 
at one time with that which he possesses at 
some other time. It would be wrong, for 
example, not to include the house owned by 
its inhabitant in an estimate of his power to 
pay income-tax, since if it was omitted, people 
of really equal means would be unequally taxed, 
and a premium would be put upon the owning 
of houses by their inhabitants. Similarly when 
we think it desirable to include in the income 
of a farmer an estimate of the money -value 
of the produce of the farm which he and his 
family consume, we really do it because we 
have in view some comparison between the 
spending power of farmers and that of other 
classes who have no such goods coming in ; 
or between the powers of different classes of 
farmers, some of whom have a greater and 
some a less value of such goods coming in 
reckoned in proportion to their strictly money- 

11 'I 




income. If no such comparison is in con- 
templation—for example, if comparison is 
being made between a number of farmers 
carrying on the same kind of agriculture in 
similar circumstances, so that the proportion 
between their money-incomes and these other 
goods is uniform throughout— we should not 
think of troubling to include the other goods. 
We have not been in the habit of including 
the " annual value " of furniture and clothes 
owned by the person who uses them in esti- 
mates of his income in the same way as we 
usually include the annual value of the house 
owned by the person who lives in it, although 
it is of precisely the same character. Partly, 
no doubt, this is because it is less important, 
being probably under half the value of the 
house at an average. But there are also two 
other and better reasons. In the first place, 
until recently at any rate, nearly every one who 
has had the use of furniture and clothing of a 
value great enough in proportion to his money - 
income to be worth considering, has owned that 
furniture and clothing, and the value of such 
things owned by each person has varied 
roughly with his income. Secondly, it is diffi- 
cult to make any accurate estimates of the 
annual value of these things, so that estimates 
of incomes which included them would be really 
less informing than estimates which expressly 
omitted them. 

The same principles apply to the inclusion 
or non-inclusion of an estimate for the value 
of board and lodging received as part of their 
remuneration by domestic servants and others 
in exchange for services rendered to their 
employers. If we want to use income for the 



purpose of comparing the economic position 
of such persons with that of another class which 
does not receive board and lodging, we niust, 
of course, brave the difficulties of estimation : 
but in instituting a comparison between the 
cook's place at Mrs. Smith's and at Mrs. 
Brown's, we should prefer to hear from those 
ladies that Mrs. Smith paid £25 and Mrs. 
Brown £30, rather than that Mrs. Smith esti- 
mated the total income of her cook at £50 and 
Mrs. Brown that of hers at £54. 

If asked why we never attempt to include 
in incomes estimates of the value of the ser- 
vices gratuitously rendered by men and women 
—we should, perhaps, drop the conventional 
order and say women and men here— to them- 
selves and their families, we should probably 
at once reply " Because they are invaluable, 
and this is as good an answer as can be given. 
It is not practically possible to value the 
domestic services of a wife and mother to her 
husband and children : they are not practically 
interchangeable with hired services in the same 
way that eggs produced in one farmer's yard 
are interchangeable with eggs produced in 
another farmer's yard. 

The conclusion is that the term income as 
commonly used includes in addition to money - 
income an estimate of the money -value of in- 
comings of such other commodities and services 
as are ordinarily bought and sold and can 
consequently be valued with substantial 
accuracy . 

On the other hand, a great deal of money 
received is clearly not included in the common 
conception of income, in which it is dis- 
tinguished from mere " receipts." 

., «■ 

M . 



We do not include in income the money 
which a man gets by robbery or theft, whether 
he gets it by taking money itself or by taking 
other things and selling them for money. 
Little importance need be attached to this fact. 
It seems to be chiefly due to the illegality of 
robbery and theft. Naturally a man will feel 
indisposed to ejiter in his income-tax return 
" From the trade or profession of burglar 
carried on by me in London, £1,000," and 
he is not bound by law to do so ; if the law 
catches him, it will not take 9d. in the pound 
from him nor even is. 2d., but the whole 20s., 
and restore it to the rightful owners. Gains 
which are on the face of them illicit escape 
inclusion in income because those who make 
them never declare them and other people do 
not know of them. But when the illegality of 
the gain can be concealed, it constantly happens 
that illegal gains do appear in income, and 
nobody thinks of rejecting them from the 
category of income. If a baker sells his 
customers bread 10 per cent, short in weight, 
it will come to much the same thing as if he 
sold them full weight at the same nominal price 
per pound and afterwards went round to their 
houses and stole money to the amount of one- 
ninth of their bread bills. But the short-weight 
gains would be treated as income by income- 
tax authorities and every one else, while the 
gains by stealing would be excluded. There 
is, of course, no doubt that a vast mass of 
income is obtained in unlawful ways, so that 
we need not attach much importance to the 
fact that gains which are obviously unlawful 
when described by particular designations do 
not appear, at any rate under those heads, in 



published .accounts. Doubtless in the private 
mental records of the burglar and the pick- 
pocket, whether the word income is actually 
used or not, no fine-drawn distinction between 
the proceeds of legitimate and illegitimate 
" industry " is attempted. 

No one thinks of including what he inherits 
or receives by bequest in a statement of his 
income. The reason for this seems to be that 
the word " in -come " does not suggest anything 
coming in casually once for all, but some con- 
tinuous receipt which can be conceived as 
a rate per annum, although no doubt often a 
fluctuating rate. If a man who received a 
legacy of £2,000 last year was asked why 
neither he nor any one else included it in his 
income for last year, he would probably reply 
" Because it was a windfall which cannot be 
expected to recur. My income fluctuates 
between £800 and £1,200 a year in an 
ordinary way. Why should I say it was 
£3,000 last year when I got a legacy of 
£2,000 in addition to what every one calls my 
income in the other years ? Would it not be 
very misleading?" It certainly would be mis- 
leading to any one who took the £3,000 as an 
indication of the man's ability to pay taxes 
or subscriptions to charities and football clubs 
year by year. Why not, then, some one may 
ask, strike an average, throwing legacies into 
the total and averaging out to get a fair annual 
sum? Obviously because an average of that 
kind would be of no use unless it extended over 
the whole of a man's life, and little use then. 
What is useful is something which will be a 
guide for the immediate future, and this is 
provided by the ordinary method of reckoning, 







excluding legacies, and would not be provided 
by any conceivable method of including them. 
That the kernel of the matter is to be found 
in the " windfall " nature of legacies is shown 
by the fact that if it were known that a par- 
ticular person's cousins would die regularly, 
one every year, and would each leave him 
£1,000, and that their number was infinite or 
even simply sufficient to last his lifetime, we 
might, indeed, still hesitate to call this regular 
£1,000 a year "income," because we should 
be influenced by the general rule in our mind 
that legacies are not income, but we should 
feel no difficulty in deciding that the pro- 
fessional legatee would be " justified in treat- 
ing the £1,000 a year as income." 

Gifts from the living are excluded from 
calculations of income just like bequests from 
the dead. Some gifts are casual, like legacies 
and would be excluded for the same reason, if 
there were no other. But very often this 
reason does not apply : the receipts of niost 
beggars are probably as steady as the receipts 
of large classes of workers, and the greater 
part of money received by way of gift is re- 
ceived in allowances and pensions of a regular 
character which can be depended on at least 
as much as most incomes derived from labour. 
Here we seem to be influenced by the feeling 
that " double reckonings " are misleading. We 
should be inclined to say, for example, that it 
would be misleading to treat the income of a 
family as increased by the father giving his 
daughter an allowance of £20 per annum, and 
if we say the daughter has an income of £20 
we must do so, unless we treat the father's 
income as reduced by the s^e amount, which 

we do not think of doing. If the father wants 
to reduce his income by £20 in order to get 
a better abatement of income-tax or for any 
other reason, he must hand over to his 
daughter property yielding £20 per annum 
or secure the income to her in some legal way. 
So long as he does not do that, he has the 
ultimate control, and therefore we regard him 
as the income-receiver. 

Even when we come to the undoubted sources 
of income, the possession of property and the 
performance of labour, we find that a large 
amount of money received is by common con- 
sent excluded from the category of inconie. 
Let us deal with these two sources separately, 
beginning with property. In the first place, in 
order to be regarded as income receipts from 
property must come in regularly : not necessarily 
always exactly at the same rate, nor even with- 
out occasional intermissions, but regularly 
enough to be looked on rather as we look on the 
flow of a river. The flow may now be great and 
now small : it may even dry up for a week or 
two at a time once or oftener every year, but 
still there is the idea of a flow at some rate or 
other over a reasonable period. So if a man 
makes a regular business of buying land and 
selling it again, whether he divides or amalga- 
mates the lots which he buys or leaves them 
alone, and whether he does anything to the 
land or not, we should reckon any profits which 
he made as income, just as we should reckon the 
profits of a picture-dealer. But if a private 
person bought a piece of land and let it to a 
farmer or hved in a house upon it for twenty 
years, and then sold it at a profit, we should 
not include that profit in a statement ot his 






income : we should regard it, like a legacy, 
as a windfall. 

Secondly, the more or less steady flow from 
the possession of property in order to be called 
income must ordinarily be of the nature of 
profit, that is to say, it must not include such 
part of total receipts as are necessary in order 
to pay necessary expenses, including the main- 
tenance of the property unimpaired. A boot 
retailer who sold boots for no more than just 
sufficient to pay back what they cost, including 
the expense of keeping up the shop and all 
other necessary outlay, might carry on a big 
business and receive quite regularly week by 
week a very large sum, but none of it would 
be income : the income which such traders 
obtain is the surplus over the expenses neces- 
sary for carrying on the business and maintain- 
ing the capital intact. Even the rent of lands 
and houses is not all income, inasmuch as the 
contracts between landlord and tenant do not 
usually bind the tenant to pay everything neces- 
sary for maintaining the land and house in 
an unimpaired condition. An owner must then 
pay out a certain portion of his rent for repairs 
and renewals under penalty of seeing his rents 
diminish in the future, and this portion is 
deducted from his rent before we declare his 

While there is a universal acceptance, in 
regard to most kinds of property, of the 
principle that income is only what is left after 
all expenses, including the expense of main- 
taining the property unimpaired, have been 
allowed for, it must be admitted that no very 
precise interpretation of " the expense of 
maintaining the property unimpaired " has been 

agreed upon. It cannot well be taken to mean 
that so much must be annually set aside that, 
no matter what happens, the property will con- 
tinue to yield the same amount in the inter- 
minable future as it yields at present after the 
necessary deduction has been made. As we 
cannot foresee the future with any accuracy, 
this would be justly felt to be an absurdly 
high ideal of permanence to aim at. It would 
seem silly to say that the English agricultural 
landlords' incomes in the first seventy years 
of last century were really much smaller than 
they were reckoned to be, since the landlords 
ought to have been laying aside large portions 
of tTieir rents, so as to secure after 1870 in- 
comes equal to the amounts properly regarded 
as income before the depreciation which set 
in at that date. . 

" Maintenance of the property unimpaired 
is, in fact, interpreted in different senses in 
regard to different kinds of property. If the 
property can be maintained so that it goes 
on consisting of the same physical constituents 
without their being the worse for time or wear, 
this kind of maintenance is regarded as suffi- 
cient. But the case is a rare one, some kinds 
of land being the only important example. It 
is much more common for the actual con- 
stituents of the property to change in character. 
A Lancashire mill may still be on the same 
site as when the business was started a century 
ago, and may still belong to the same family 
or company, and may have continuous accounts 
covering the whole period, but scarcely any- 
thing in it will much resemble the plant with 
which it started. When the things concerned 
have altered in this way, how are we to decide 





whether the property has been maintained 
intact, increased, or diminished ? 

The usual practice in a great many situa- 
tions is to decide by a money -valuation of 
assets, and the property is assumed to be un- 
impaired if the various items of which it 
consists, taken as a whole, retain the same 
market value. Such a method of reckoning, 
for example, is usually supposed sufficient for 
ordinary agriculture : the farmer's stock, " live 
and dead," is valued at the beginning and 
the end of the year, and the difference between 
the two valuations, if a gain, is regarded as 
part of his income, and, if a loss, is subtracted 
from his gross receipts, before his '* true " 
income is declared. 

But this method is clearly quite inappropriate 
when the plant of the business is fixed to the 
ground and specialized to the particular kind 
of trade carried on. We cannot tear up the 
half -worn -out rails of a tramway or pull down 
the walls of a dock and sell them in the nearest 
market with the ease and absence of loss with 
which a farmer can drive his cattle and sheep 
to the next market town and dispose of them 
among his neighbours. In such cases it is 
usual t(0 lay aside annually sums which are 
expected to accumulate during the lifetime of 
perishable plant sufficiently to provide for the 
replacement of that plant. The sums thus paid 
into a " depreciation fund " are deducted from 
the gross receipts of the business before the 
income of the owners is declared. Whenever 
it is not, as a matter of fact, probable that 
plant will be replaced by plant of the same 
value, either owing to change of methods or 
change of prices, differences of opinion are 

likely to arise, even among fairly good financial 
authorities and experts in the particular busi- 
ness, about what the payments to depreciation 
ought to be. These differences lead to con- 
siderable differences in the calculation of in- 
come from property, and prevent it being a 
matter of simple arithmetic as we are apt to 
suppose it. 

Moreover, the principle of non -impairment, 
though, as has been said above, it is accepted 
ordinarily or with regard to most kinds of 
property, is not applied to every kind of 
property without exception. If a person sells 
land and buildings he does not dream of 
regarding the whole proceeds less incidental 
expenses as income, and the fact that the land 
contained minerals would make no difference. 
But if he hires men to dig out the mineral, 
and sells it ton by ton, he and every one else 
ordinarily regards the difference between his 
receipts and the whole expense of working the 
mine as income : so, too, if, instead of work- 
ing the mine himself, he allows others to dig 
out the mineral on condition of paying him a 
royalty of so much a ton, the whole of the 
royalty, less any incidental expenses of getting 
it, is regarded as income. In neither case is 
it usual to say that '* he has to provide for 
the depreciation of the mine " out of what he 
gets before his income is declared. The reason 
why provision for depreciation is not expected 
here is doubtless to be looked for in the fact 
that, in the past at any rate, men's knowledge 
of what is below the ground has been so small 
that no one has usually formed definite esti- 
mates of the total amount of available mineral 
to be found in any particular property, and 



the rate of working has been slow, so that 
there has been a natural inclination to regard 
each mine as '* practically inexhaustible," and 
the output accordingly as a permanent flow. 
The quicker the rate at which the valuable 
matter can be removed, the more likely is the 
owner to shrink from regarding the payments 
he receives for it as income. If, for example, 
instead of being mineral deep down below the 
surface, accessible only by narrow shafts 
equipped with lifting apparatus and by long, 
low tunnels, the valuable matter is some surface 
deposit which can be easily removed in a few 
months, he will regard its sale in the same way 
as he would regard the sale of acres of land. It 
seems, therefore, that the apparent exception of 
income from mines from the rule of non-impair- 
ment of property is the consequence of the diffi- 
culty of reckoning impairment and its supposed 
insignificance rather than the result of the 
application of a principle different from that 
applied to ordinary incomes. 

There is more ground for supposing the 
application of a different principle to life- 
annuities when received by the person on whose 
life they depend. The right to such an annuity 
is property, and it is a property which depre- 
ciates as the annuitant grows older, but the 
annuitant does not regard the income he re- 
ceives from the annuity as less than the annuity 
by an amount sufficient to provide for the 
depreciation, so that a fund may be provided 
great enough to furnish the same income (thus 
calculated) after his decease as before. He 
always regards the whole of the annuity as 
income, though " only a life income." The 
fact is that there are two sorts of permanence, 



one of which we indicate when we say it 
will last for ever," and the other when we 
say "it will last my time," and the secured 
life-income, though it has not the first kmd 
of permanence, possesses the second. It should 
be noticed, too, that the need of providmg 
for depreciation of property does not present 
itself to the annuitant, inasmuch as he is not 
in the habit of reckoning the value of the 
annuity among his assets. If he bought the 
annuity with a lump sum, he did not think of 
the purchase as an ordinary " investment," but 
rather as a " sinking of capital." If he bought 
it by small payments spread over many 
years, he regarded those payments not as pur- 
chasing him a property of so much capital, 
but as simply buying him the annuity. And 
if the annuity was given him, he never reckoned 
it as such and such a capital sum, but regarded 
himself simply as a person who would from that 
time forward receive the specified annuity till 

Coming now to the incomes contamed m 
salaries, wages, and other receipts connected 
with the performance of labour rather than the 
ownership of property, we find that the deduc- 
tions commonly made from gross receipts 
before income is declared are here of much less 
importance. Ordinarily, indeed, they are so 
small that in practice they are disregarded. 
But we admit that in strict accuracy they ought 
to be made. We are always willing to 
deduct the cost of providing any materials 
which are '* found " by the worker out of 
what are called his wages or his salary. We 
will allow, too, for the cost of replacing any 
tools which he has to provide and interest on 

It ^ 



their original cost. We admit, in short, that 
all expense to which the worker is put by the 
conditions of his work in the present must be 
deducted, although we may often have great 
difficulty in saying whether some particular ex- 
pense like that of living in a highly -rented 
locality, or of paying railway or tram fares in 
order to avoid doing so, is expense caused 
specially by the work or by the worker's own 
tastes and desires. 

But though we allow for continuing expenses 
in the present, we seldom think of allowing 
anything for the original expenses of training 
the worker for his particular occupation. 
Hundreds, and often thousands, of pounds may 
be spent on the training of a person for an 
occupation, but the very first time he earns 
a sovereign, that sovereign is treated by every 
one as his income, and the moment he earns 
£161 in a year the income-tax collector is 
entitled to collect ninepence from him. So far 
as the ordinary conception of income goes, all 
this expense is treated as non-existent in 
reckoning the incomes of the earners. Neither 
interest nor sinking fund is allowed for. There 
is, however, in reality nothing surprising in 
this fact. Workers are not brought up on 
commercial principles, like horses, with a view 
to the profits of owners. They are brought 
up and trained by their parents, by charities, 
and by the State, and it is only in rare instances 
that they are asked to repay any part of the 
cost. Consequently the cost is not looked upon 
by those persons and institutions which defray 
it as an investment but as an outlay which will 
bring them in no money return. Moreover, 
it is often almost impossible to disentangle 



the special expense from other expense which 
would have been incurred whether the work y^s 
to be taken up or not. We can realize the ditti- 
culty when we reflect that the most expensive 
education is often given to those who are 
scarcely expected to earn anything, eitner 
because they are too rich or too defective. 

The degree of permanence which we expect 
from an individual's income earned by labour 
is even less than that which we attribute to 
a life -annuity. A life -annuity is expected to 
last as long as life, a labour income only as 
long as working life, which cannot be longer 
and may be much shorter than life itself. We 
do not deduct from wages or salaries an amount 
for the depreciation of the worker before we 
declare his income. 

Consequently, if we disregard the exceptional 
cases, which, taken as a whole, are really ot 
little magnitude compared with the general 
mass, we may say that the income of an indi- 
vidual, as commonly reckoned, is equal to the 
flow of money, usually expressed as so much 
a week or a year, which, without any assistance 
from gifts, inheritances, or recognized robbery 
and theft, and without diminishing the property 
he has already obtained by any method he 
can have taken away from him by robbery 
or taxation and can voluntarily spend in gitts, 
in purchases of commodities and services 
(whether taxed or not) from which he expects 
no monetary return, in acquiring additional pro- 
perty which he expects to yield him an income 
in the future, and also in purchasing commodi- 
ties and services from which he expects an 
income because they increase his earning capa- 
city by improving his talents and knowledge. 



In addition to individuals some institutions 
are commonly regarded as possessing incomes. 
We do not and need not regard ordinary corn- 
mercial companies as having incomes in 
addition to the incomes of their members. Nor 
do we or need we regard the amounts received 
by institutions in gifts or legacies as income 
to them any more than we regard similar 
receipts as income to individual recipients. But 
the net yield of any non-commercial institu- 
tion's endowments clearly comes under the 
ordinary conception of income : it is an 
income from property just as much as if it 
belonged to an individual owner. If a 
hospital or a school, for example, possesses 
land or consols, the income is perfectly genuine 
income. It may be spent on nursing the sick 
or on teaching the young, but it will not 
be reckoned as part of the income of those 
persons, and so there is no " double reckoning " 
in treating it as income of the institution. 

The position of the States and their sub- 
divisions in regard to income is much more 

When a State or a local authority possesses 
ordinary income-yielding property, such as Suez 
Canal shares or land let to individuals for a 
rent, there seems at first sight no reason to 
refuse the application of the name income to 
its receipts. On the other hand, we usually 
shrink from regarding receipts from taxes as 
income of the State which collects them. We 
make this distinction between the yield of 
property and the yield of taxes because we 
think there will be " double reckoning " if we 
include taxes in income, and not if we only 
include the yield of property. We think we 



have already reckoned the yield of the taxes 
in the incomes of the people who pay them, 
while we have not reckoned the yield from the 
property in any one's income. 

But neither of these beliefs are quite so 
easily justified as we at first imagine. It is no 
doubt true that we should have double reckon- 
ing if we first reckoned individuals' incomes 
in the ordinary way without deduction tor taxes, 
and then reckoned the gross or net yield ot the 
income-tax as income to the State. When we 
say that a man has £1,000 a year, we mean 
that he has that sum gross, before his income- 
tax has been paid (either directly by himself 
or by way of deduction), and it would be 
clearly double reckoning to say that the State 
had the amount as income as well as he. but 
the income-tax has a character of its own, and 
the argument which applies to it does not seem 
to apply at all to the yield of ordinary taxes on 
commodities, such as that on tobacco or tea. 
Such taxes do not appear in an individual s 
accounts as charges to be paid out ot liis 
income, because they are wrapped up in the 
higher prices which he has to pay tor the 
commodities which they make dearer. Ihis 
involves a real difiference : when a man pays 
income-tax he does it because he must, and 
not because he gets something worth paying 
for but when he buys a shillingsworth ot 
tobacco he does actually get something which 
he reckons worth at least a shilling. It the 
State gets lod. net out of the shilling, it seems 
really less confusing to regard the man and the 
State as having between them is. lod ot 
money -income to spend than to say that there 
is only IS. of income, all belonging to the 






individual, from whom the State exacts lod., 
leaving him with only 2d. The man really has 
IS. to spend. The millions raised by the 
tobacco duty might be raised, as they are in 
France, by a State monopoly of tobacco : if 
the yield of the tobacco tax is not income 
in the United Kingdom, the amount raised by 
the tobacco monopoly in France cannot be 
income ; but if the monopoly were the result 
of private commercial arrangements, should we 
consider the profits won by the monopolists 
in consequence of the existence of their 
monopoly as not properly income because it 
was got out of the prices charged to the con- 
sumers ? Do we ever apply that principle, say, 
to the profits of the Standard C3il Company ? 
This suggests that we might possibly make 
a distinction between direct taxes not paid in 
prices and indirect taxes paid in prices, and 
confine the doctrine that taxes are reckoned 
in individuals' incomes to the first class. But 
there is no way out of the difficulty by that 
method. It would be very confusing to say 
that the yield of the income-tax and of the in- 
habited house duty are not income in addition 
to the incomes of the taxpayers, but that if a 
tax were laid on the building of houses, and was, 
therefore, paid in the first place by the builders 
of houses, but ultimately by the users of houses 
in higher rents and purchase-prices, the yield 
of this tax would be additional income. What 
diflference can it make whether I pay for a 
house £100 a year rent and £3 15s. house 
duty or £103 15s. rent and no duty? It 
would seem absurd to say that in the first case 
I spend income amounting to £103 i 5s. and the 
State takes £3 15s. of it, but in the second 



case I spend £103 i.5s. of mcome and the 
State has, in addition, £3 15s- of income. 

The second belief-the doctrme that we need 
not fear double reckoning when the State has 
ordinary receipts from ordinary property—also 
appears less plausible on exammation. When 
a territorial authority is in the enjoyment ot 
such receipts, the presumption is that they will 
be spent in some way which will relieve the 
territory from taxation, and this will make the 
territory a more desirable one in which to hve 
or carry on business. That, again, must tend 
to raise the value of land within it, and so to 
raise the income of landowners. In the case 
of a considerable territory such as the United 
Kingdom owning a small block of property 
Hke the Suez Canal shares, any such effect is 
likely to be so inappreciable that most persons 
will be inclined to deny its existence. But no 
one will doubt that Mr. Carnegie might endow 
any small town with property enough to cause 
a very perceptible rise in the value of the land 
inside it, and it is said that rents in a certain 
small parish in an old town are actually per- 
ceptibly higher than in the neighbouring 
parishes in consequence of the number of per- 
sons attracted by the charitable endowments 
belonging to the parish. It is only common 
sense to recognize that any property ot which 
the ownership is attached to a particular 
territory must raise the value of that territory 
if the yield from the property is spent in 
making the territory attractive. 

It seems best to avoid the necessity ot 
solving these puzzles. To avoid it we need 
only refrain from the attempt to build up an 
aggregate income including incomes of states 




1 60 





and all non -commercial institutions as well as 
incomes of individuals. This need cause us 
no regret, since the whole importance of the 
conception of income is to be found in con- 
nection with individual property. The con- 
ception is useful as an aid in the comparison 
of the wealth of individuals, and in a less 
degree of groups of individuals, so far as their 
wealth is connected with separate property ; 
it is of no use so far as common property is 
concerned, nor where there is no property. 

Returning, then, to our consideration of indi- 
viduals' income, we may observe that the 
amount of which people are actually robbed 
is not, under modern civilized conditions, of 
any great magnitude ; and the amount of which 
people are deprived by taxation, though of 
greater magnitude, does not make much differ- 
ence as between one person and another, in 
consequence of the natural tendency of 
governments to tax the richest persons most and 
the prevalent belief that taxation ought to be 
according to ability to pay. Consequently the 
amounts of income which people have left 
them to spend (or save) as they like are 
approximately proportionate to their whole 

Now, certainly an individual with property 
may for a time put forth a demand and conse- 
quently exercise a control over production in 
excess of what his spendable mcome alone 
entitles him to, if he chooses to part with 
property he already possesses. Smith saves, 
and with his savings buys land, or a house, or 
consols from Jones, who then can do what he 
likes with the proceeds, either investing them 
so as to bring in income or spending them on 

commodities and services which will bring in 
no income. If he invests, he it is, and not 
Smith, who immediately determines what kind 
of addition to property shall be made, but ot 
course he is governed in his decision by his 
opinion of whit demand will be in the future. 
If he merely " spends," however, he so to 
speak, cancels Smith's savings, and his own 
tastes will decide what shall be produced. So 
that every one who has property, and can tin a 
savers to buy it, may both divert Society from 
providing for the future and decide what kind 
of present goods shall be produced. A very 
large number of persons act in this manner 
by '' spending " legacies which they have re- 
ceived from richer or more provident relatives 
But the magnitude of the property so dealt with 
is not very considerable, so that the total 
demand coming from reduction of individuals 
property is also small in proportion to the 
whole. In spite of the flagrant examples 
which occasionally strike the eye in the new - 
papers, it is quite unusual for well-to-do people 
fo spend much more than their mcomes. 

It is also true that income-receivers often 
hand over portions of their incomes to others 
to spend, and that then these others exercise 
the power of demand and control over pro- 
duction. If, for example a father makes his 
daughter an allowance of £20 per annum to 
do what she likes with power to that ex e^ 
is transferred to her. But this is of little im- 
portance : the power is only delegated and 
is withdrawn by the giver as soon as he dis- 
approves of the' way in which it is exercised. 
It is a matter of the merest detail. 

We may say, then, that individuals' power 


1 62 




.f -f 


of demand and consequent control over the 
economic activity of Society is distributed and 
exercised approximately in proportion to the 
comparative magnitude of their incomes. 

The next important question is what settles 
who has a large and who a small income 
or none at all, or, as it is usually expressed, 
what settles the distribution of income ? But 
this question has been so much obscured by 
the traditional classification of incomes under 
several heads that it is desirable first to 
devote a chapter to the consideration of the 
classification of incomes. 



The classification of incomes which is found 
most convenient for purposes of economic 
exposition naturally does not remam always 
the same. It changes with changmg social 
conditions. That which was convenient in 
England in the eighteenth century would not 
have been very enlightening in India at that 
time and is not very suitable for English use 
in the twentieth century. But tradition con- 
nected with it still plays such a large part in 
forming the thought of the present time that it 
would be useless to ignore it. 

It was a threefold classification into wages, 
profits, and rent, which corresponded very well 
with the productive organization of the time 
and place. In the country the labourers were 
a fairly well-defined class receiving wages and 
nothing else, the landlords another fairly well- 
defined class receiving rent and nothing else, 
and the farmers another such class making 
profits and having no other income. In the 
towns it is true, the profit -makers in the shape 
of merchants and manufacturers often owned 
the land on which shops, counting-houses, and 
factories were built, but this was regarded as 
a small matter which did not suffice to turn 


''i. . 


them into " landlords," as the rental value of 
their premises would be generally trifling in 
proportion to their gains as " monied men." 
Land in towns was practically ignored : the 
** labourers " in towns were in just the sanie 
position as in the country, so that the classifi- 
cation of income into wages, profits, and rent 
seemed to fit the national classification of per- 
sons quite satisfactorily. Moreover, it seemed 
to be suitable for explaining the organization 
of production prevalent in England at the time. 
In the country the produce belonged to the 
farmer, and he looked to it to recoup him for 
what he spent in wages and rent, which were 
regarded as constituting together practically the 
whole of his expenses. Merchants and manu- 
facturers certainly had to purchase materials 
and goods, but what they laid out in this way 
might be treated as ultimately replacing what 
had been spent in wages and rent by some 
farmer or manufacturer who produced the 
materials or goods in question. The threefold 
classification was introduced into economics by 
Adam Smith, and it seems probable that he hit 
upon the idea while attemptmg to analyse prices 
into their component parts. " Market price," 
or the fluctuations of price in the market, 
depended, he thought, on supply and demand, 
but " natural price," or price in the long run, 
depended on how much wages, profits, and 
rent had to be paid in order to secure the 
commodity. By what may perhaps be called 
a mere accident, he was led to convert this 
theory of prices into a classification of income. 
While he was thinking out his theory of prices 
in Scotland, there flourished in France a litde 
school of economic and political theorists who 


were called at the time the Economistes, but 
who were subsequendy, in order that confusion 
might be avoided, christened " Physiocrats 
in consequence of their belief in the rule ot 
Nature. The school was the product of ^. re- 
action from Colbertism, which had tried to 
bring prosperity to France by favouring manu- 
factures and commerce. Its principal tenet was 
that agriculture, or at any rate the earth, was 
the source of all wealth, and its great revela- 
tion regarded with amazing veneration by the 
elect was the Tableau Economique or Econo- 
mical Table, in which its founder, Quesnay, 
tried to show by a number of zigzag lines how 
the produce of the earth was " distributed, 
as he called it, throughout society. On making 
acquaintance with this scheme, and seeing the 
immense importance which the physiocrats 
attached to the "distribution" which it was 
supposed to portray, x\dam Smith seems to have 
resolved to treat his own analysis of prices into 
wages profits, and rent, as also a classification 
of incomes. He said that just as the price of 
any particular commodity resolves itself into 
one two, or all three of the three component 
parts, wages, profit, and rent, so the price of 
all the commodities which compose the whole 
produce " must resolve itself into the same 
three parts, and be parcelled out among 
different inhabitants of the country, either as 
the wages of their labour, the profits of their 
stock or the rent of their land. The whole ot 
what 'is annually either collected or produced 
by the labour of every society, or what comes to 
the same thing, the whole price of it, is in this 
manner originally distributed among some ot its 
different members. Wages, profit, and rent are 



the three original sources of all revenue as 
well as of all exchangeable value." 

The three terms, wages, profit, and rent, 
seem to have been used in the ordinary con- 
versation and literature of Adam Smith's time 
very much as they are at present. Wages 
meant what was paid to persons for their work 
when they were paid at a rate agreed on before 
the commencement of the work, and when they 
worked more or less under the supervision of 
the employer ; rent meant the periodical pay- 
ments made to the " landlord " by a tenant of 
land and anything affixed to and let with the 
land, S;uch as hedges and ditches and houses ; 
])rofit meant any net gain arrived at by deduct- 
ing expense incurred from gross receipts. 
Roughly speaking, no doubt, it could be said 
that labourers lived on their wages, landlords 
on their rents, and farmers, merchants, and 
manufacturers on their profits. But certainly 
the three words, as ordinarily used, have 
always included some receipts which lie outside 
income and do not include the whole of those 
which lie inside it. The contracts under which 
the great bulk of rent is paid do not secure the 
landlord " a clear annual rent without any de- 
duction whatever " : he has usually to expend 
an appreciable proportion of his rent in keeping 
the property in a rent -yielding condition, so 
that the income derived from the property is 
appreciably less than the rent. The wage- 
earner likewise has often to pay out of his 
wages some necessary expense of the work 
which he does, as when he provides his own 
tools. On the other hand, the three terms do 
not together cover the whole of income, as 
there are many other receipts of which the 


whole or part forms or contributes to the 
income of those who receive them, ihere are 
for example, salaries received by workers ot a 
higher class than those who are said to receive 
wages, fees received by others who are less 
subject to supervision by their employers than 
wage-earners and receivers of salaries, as well 
as fines dues, royalties, and other payments 
received by owners of property. In the passage 
quoted Adkm Smith ignores all these discrepan- 
cies • he alleges explicitly that the three cate- 
gories taken together include the whole of 
fncome, and he implies that they include 
nothing else. What he was real y doing with- 
out clear comprehension of the fact, was 
defining labour, ^stock, and land so that together 
thev would include all sources of income, and 
defining wages for his purposes as income 
derived^rom labour, profits as income derived 
from stock, and rent as income derived from 

^^He admits in subsequent paragraphs that 
-common language" does not f ways agree 
with his definitions : a man cultivating his 
^wn land, he says, will call the whole of his 
eain " profit " without allowing anything tor 
fent • a tenant farmer who supervises the work 
of the farm and even assists with his own hands 
will callTll that is left to him after paying 
working expenses and keeping up the stock 
-Profit " without allowing anything to hmisel 
as the wages of his labour; an independent 
artisan who makes things for his customers 
fns ead of working under a master will also 
call his gains "profit" without making any 
aUowance^or wa|es ; and finally, a working 
gardener who owns his own garden is com- 


monly considered " as receiving the ** earn- 
ings " (not, be it noticed, the " wages ") " of 
his labour," nothing being taken off and attri- 
buted to him as the profit of his stock or the 
rent of his land. But these observations did 
not suggest to his mind any doubt about the 
convenience of his definitions. He merely 
infers that '* common language " is wrong, and 
that it " confounds " the different sorts of 
income. " When," he says, " those three 
different sorts of revenue belong to different 
persons, they are readily distinguished, but 
when they belong to the same they are some- 
times confounded with one another, at least in 
common language." 

The weak point of this exposition is that it 
gives no example of cases in which " those 
three different sorts of revenue belong to 
different persons." In fact, it is extremely diffi- 
cult to find one. The large class of tenant 
farmers, on Adam Smith's own showing in the 
passage just quoted, receive " wages " in his 
sense of income from labour, as well as profits 
or income from stock, and in a later chapter he 
tells his readers that the greater part of the 
gains of a retail shopkeeper may easily be 
" real wages." Wholesale merchants and 
manufacturers he seems to have regarded as 
receiving no appreciable amount as " the wages 
of a particular sort of labour, the labour of 
inspection and direction," but, all the same, 
he seems to have supposed that about half 
their gains were due to some undefined exercise 
of activity, since he quotes with approval the 
common estimate that a fair profit is double 
the rate of interest. This estimate suggests 
at once the question why the income derived 



from the ownership of stock should be coupled 
up with the income derived from the owner s 
exertions by the whole being called prohts 
of stock " or of capital. Why not admit that 
the wholesale merchant and the manufacturer 
as well as the retailer and the farmer earn by 
their labour all that they get over and above 
ordinary interest on their capital ? 

For nearly a century after Adam Smith 
wrote, economists were prevented from taking 
this step by theories of wages which required 
them to believe that wages in the ordinary 
sense (agreed payments for labour executed 
more or less under the supervision ot the em- 
ployer) were regulated by principles entirely 
different from those which regulate other 
earnings of labour, in regard to which there is 
no contract of service. Though they formally 
defined "wages" as if the term were 
synonymous with income derived from labour, 
they always had in their minds wages in the 
ordinary sense, and the theories which they 
framed respecting wages could not be stretched 
to include the earnings of the labour ot a 
person working on his own account. But when 
these theories crumbled away, the practice 
changed, and instead of " confounding, as 
Adam Smith might have said, the income which 
the owner of capital derives from his activity 
and that which he derives from his property in 
the common denomination of " profits ot 
capital," economists began almost with one 
accord to call the income derived from capital 
" interest," and to treat the other portion ot 
the owner*s gains as belonging to labours 
share though they have not as yet agreed by 
what 'special name to call it. The Americans 



usually call it " profits " simply, but English 
writers have hesitated about making so great 
a break with economic tradition, and have 
sometimes left the category nameless, and 
sometimes called it " earnings of management." 
This last course is inconvenient, because it 
mixes up the gains in question, obtained by 
persons working on their own account, with 
the incomes of persons engaged in management 
but paid by salaries or wages. 

By this division of Adam Smith's '* profits of 
stock " into two shares, one for the active 
operations of the *' undertaker of the work," 
as he was called in Smith's time, and one (to 
be called " interest ") for the passive owner- 
ship of the property, a clear line was drawn 
between income from labour and income from 
property. But another question still remained, 
namely, how to distinguish " interest," the 
share of " capital," from " rent," the share of 
land. Adam Smith himself seems never to have 
felt any need for careful distinction between 
land and what he called " stock." To him land 
was land and stock was valuable property other 
than land : land brought in a rent, and the part 
of " stock " which he regarded as " capital " 
brought in a profit, and it did not occur to him 
that any one would have or make any diflficulty 
about the matter. But even he admits that 
" the rent of land " may sometimes partly (and 
conceivably in some exceptional cases wholly) 
consist of " reasonable profit or interest " on 
capital expended on the improvement of the 
land. If we once admit that rent can owe its 
origin to the expenditure of capital in this 
way, we must admit that " land " can be 
increased in value by human labour expended 



upon it, and the sharp distinction between and 
Riven by Nature, and capital, the accumulated 
product of past labour, is hopelessly blurred. 
Ricardo made a slight attempt to enforce purity 
of doctrine by declaring early m his Principles 
that he would apply the word rent only to what 
was paid for the " original " powers of the 
land but he soon explicitly abandoned this 
proposal and drew a line between permanent 
and perishable improvements, classing the 
income from permanent improvements as rent 
of land and the income from " buildings and 
other perishable improvements " as P^ohts ot 
capital, or interest, as later writers would call it. 
This second plan of Ricardo's was generally 
followed until the last decade of the nineteenth 
century. Then it was perceived that the dis- 
tinction he favoured was not one of principle 
but only of degree ; improvements are not 
divided into two kinds, one " permanent and 
the other " perishable," but may be better 
described as all more or less permanent or 
more or less perishable. Marshall brought the 
fact into greater relief by devising the term 
*' quasi-rent " for the income derived from the 
ownership of appliances for production made 
by man, though he does not actually use it m 
place of the usual term " interest for the 
income obtained from capital regarded as a 
share in distribution. Since that time it has 
been possible for the economist to give atten- 
tion to the division between earnings ot labour 
as a whole on the one side and the income 
derived from property, whether rent, quasi -rent, 
interest, or anything else, taken as a whole on 
the other side. This I propose to do in the 
next chapter. 



Some reader may perhaps object to the divi- 
sion of all income into mcome from labour 
and income from property on the ground that 
income is sometimes obtained from personal 
qualities without labour. The Siamese Twins 
and General Tom Thumb, he will say, got their 
incomes not because they laboured, but because 
they had certain rare peculiarities which made 
people ready to pay to look at them. It is 
doubtful, however, if there are any personal 
qualities which can be exploited without some 
amount of labour. Even the Fat Woman in a 
travelling show, who might be taken as the 
type of pure passivity, has to give up her time, 
and must find being stared at and commented 
upon quite an appreciable exertion. It seems 
unnecessary to split hairs over the question. 
If any one thinks it an improvement to substi- 
tute " income from labour and personal quali- 
ties " for " income from labour," he is quite 
at liberty to do so. The change might make 
an important difference if there were any 
suggestion that workers get income because 
labour is meritorious, but there is no such 
suggestion in the present work. 




The use of the term " division of income '' in 
the heading of this chapter is not to be taken 
as implying that there is in reality some great 
common income which is divided up into 
shares. There is, no doubt, a conception ot 
the total income of all the inhabitants of the 
country, and perhaps even of the total income 
of all the people of the whole world . But tnis 
total is not a consistent whole which has to be 
divided between participants like a loat which 
is cut into slices with a knife. It is a total 
more like the total of all the grains of wheat 
produced in a year. We can think of that 
total and talk of it as being divided or dis- 
tributed between the consumers, without sup- 
posing that all the grains are ever brought 
together in a single barn or elevator and then 
parcelled out. This is what we have to do 
with income. We must recognize that the 
total is nothing but the sum of innumerable 
separate incomes of individuals and institutions, 
and a sum which cannot be expressed in any 
measure giving the bulk, weight, or number 
of the things or " satisfactions of which the 
incomes consist, but only in figures which indi- 


I! fli 





cate the number of sovereigns or dollars or 
some such standard of value which is arrived 
at as the aggregate value of all the incomes, 
each being made up of the value of its different 
parts valued separately. An inquiry into the divi- 
sion or distribution of this total is really nothing 
more than an inquiry into the comparative 
magnitude of the different " shares." It often 
happens that the " share " of a participant is 
increased by something which makes no differ- 
ence at all to the other participants, or at all 
events no appreciable difference. In such 
a case it may still be a convenient fiction to 
suppose the addition thrown first into a common 
heap and then taken out again as an addition 
to the fortunate person's share, but we should 
never lose sight of the fact that it is only 
a fiction. The various incomes are to a large 
extent independent of each other. I only use 
the phrase " the division of income between 
owners and workers " because of the clumsiness 
of the alternative " the magnitude of the whole 
income falling to owners compared with that 
falling to workers," with all the cumbrous 
phrases which would have to be brought in 
along with it to indicate changes in the com- 
parative magnitude. 

I have spoken of " owners and workers " 
rather than " property and labour " because it 
is desirable to draw attention at once to the fact 
that the number of persons who own property 
and the number of persons who work may 
undergo a relative change which may cause 
the average owner to receive a less income in 
comparison with the average worker, although 
the proportion of the total income falling to 
the share of property has increased — and, of 



course, vice versa, a change of relative numbers 
in the opposite direction may improve the 
position of the average owner compared with 
the position of the average worker, although 
the proportion of the total income going 
to the share of property has diminished. For 
example, if the total income has been 100 
(million pounds, or milliard pounds, or what- 
ever unit the reader likes to select), and 
property has been receiving 30 and labour 70 
of this amount, and then property's proportion 
rises to 35 and labour's falls to 65, the average 
owner, instead of being better off in comparison 
with the average worker, will be worse off, it 
at the same time the number of the owners has 
increased by 50 per cent, while the number of 
workers has remained stationary ; each worker 
will, it is true, be getting a slightly diminished 
proportion of the whole income, but the propor- 
tion received by each owner (on the average) 
will have been diminished still more. This is 
immensely important, since it means that the 
division between labour and property does not 
by itself settle the relative position of the 
owners and the workers. The individual 
workers may be better off in comparison with 
the individual owners when they are receiving 
in the aggregate a less proportion of the total. 
With this preliminary caution we can proceed 
to ask what determines the division between 
property and labour in the aggregate, or, in 
other words, what changes we should expect 
to alter the division in one direction or the 

other . , 

We have to do with the aggregate annual 

value of all the property on the one side and 
the aggregate annual value of all the work on 



:" W: 



the other side. Those aggregate values are 
of course made up of the value of the units 
joined with the number or amount of the units 
in each. Consequently we must not suppose 
that the division between property and labour 
is as simple a matter as any ordinary bargain, 
and is " all a question of value " in the 
ordinary sense. In ordinary questions of value 
we have only to think of the values of units — 
the value of a horse, the value of coal per ton, 
of wheat per bushel. But in our present dis- 
cussion we have to consider the annual value of 
all the property and of all the work. When 
we compare the value of pig-iron and of gold 
in the ordinary way, we have no hesitation in 
saying that, other things being equal, an in- 
crease in the annual output of pig-iron will 
reduce its value in gold, and so we may be 
tempted to say that an increase of labour will, 
other things equal, reduce the value of labour 
as compared with that of capital. That would 
be true in a sense, but not in the sense appro- 
priate to our present question. What we have 
to do is to consider the value of all the labour 
compared with that of all the property, and 
consequently we have to remember that while 
the increase in the aggregate quantity of labour 
has tended to reduce the value of a unit of 
labour (however defined), it has at the same 
time increased the number of units, and this 
increase in the number of units may, it is true, 
have fallen short of counterbalancing the fall 
in the value of the unit, but it may also, on 
the other hand, have more than counterbalanced 
it : fifteen articles at tenpence each are worth 
more in the aggregate than twelve at a shilling 



In the first place, then, let us suppose that 
a change takes place in the relative amounts 
of property and of work available without any 
change in the elasticity of demand for different 
things. Suppose, for example, that in a situa- 
tion where property has been receiving 300 
and labour 700, the number of workers is sud- 
denly raised from 20,000,000 to 22,000,00. 
We may be sure that the additional 2,000,000 
workers will cause some depreciation of labour 
as compared with property — that is, the value 
of an hour's labour will be less compared with 
the rent of a particular acre, the hire of a par- 
ticular machine or house. But we cannot tell 
whether this depreciation of the unit will be 
sufficient to sweep away the direct effect of 
the increase of 10 per cent, in the quantity 
or number of units. That depends on the 
elasticity of demand for work and property. 
Property will certainly get a larger share, in 
the sense of absolute aggregate amount ; the 
average proprietor, too, will find his position 
improved compared with the average worker. 
But all this is quite compatible with a rise of 
property's share only from 300 to 312, and of 
labour's from 700 to 763, which would mean 
that the percentages indicating the division 
between property and labour had altered from 
30 and 70 to approximately 29 and 71, labour 
thus getting a larger proportion than before. 
On the other hand, of course, with a different 
elasticity of demand, property's share might 
rise to 330, and labour's only to 745, thus 
slightly changing the proportions to the dis- 
advantage of labour ; it is even conceivable 
that the depreciation of the unit of labour might 
be great enough to more than counterbalance 






the 10 per cent, increase of quantity, so that 
property might get 400 and labour only 675, 
a smaller absolute amount as well as a much 
smaller proportion. 

So far we have supposed alterations in the 
amount of labour compared with the amount of 
property, the conditions of demand being un- 
altered. Now let us reverse the supposition, 
and imagine the quantities stationary while 
changes in demand take place. The quantities 
remaining the same, if for any reason people 
with power to demand choose to direct more of 
their power towards the purchase of work and 
less towards the hiring of property, the aggre- 
gate value of work done in the year or the 
week, or whatever period is regarded as the 
most convenient to reckon in, will rise, com- 
pared with the aggregate annual or weekly value 
of the property ; and, ot course, vice versa, 
if more demand is directed towards property 
the aggregate annual value of the property 
will rise, compared with that of work. The 
first change will mean that labour will get a 
larger proportion than before, and the second 
that it will get a smaller. 

It is perhaps a little difficult to give actual 
examples of changes in either direction, 
but the following suggestions may be offered. 
(i) Increase of income is often a cause of 
change of demand as between different com- 
modities and services, and it may, on the whole, 
perhaps make people inclined to spend a larger 
proportion of their income upon the use of 
land, houses, vehicles, pictures, and such things, 
and a less proportion in ways which tend to 
raise the value of work as compared with 
property. But the case is far from strong. 



(2) Changes of taste or fashion are probably 
more important in practice. It is easy to 
conceive changes of this kind which would 
make a considerable difference. We might, 
for example, become so convinced of the 
desirability of living in fresh air that we 
abandoned the use of houses : the abandon- 
ment of houses would lead necessarily to the 
abandonment of such furniture as could not be 
waterproofed, and the income set free from 
the maintenance of these things would no doubt 
largely go to pay for the doctoring and mas- 
saging rendered necessary by the increase of 
rheumatism. Thus the change would be 
decidedly favourable to labour's share. Some- 
thing of the kind has actually happened, though 
of course on a much smaller scale. At one 
time a rich man's taste for display was chiefly 
satisfied by the employment of large numbers 
of retainers ; later this fashion largely dis- 
appeared, and lovers of display began to prefer 
palaces, pictures, and jewels. If Mr. Pierpont 
Morgan, instead of collecting art treasures, had 
chosen to spend his income like Warwick the 
King-maker, labour's proportion of the whole 
income would have been a little larger than it 
was. (3) Lastly, inventions of machinery and 
discoveries of new and better methods, without 
altering the ultimate consumers' tastes, cause 
changes in the relative demand for instruments 
and for labour. One invention shows how 
labour can be economized by the use of some 
elaborate machine, and thus tends to depreciate 
labour compared with the use of machinery 
and property in general ; another discovery 
shows how to dispense with machinery, and 
thereby tends to cause labour to have a higher 


1 80 


value in proportion to the annual value of 

It is natural to ask what has been the net 
result of these causes in the past. Have they 
actually resulted in property receiving a larger 
or a smaller proportion of the whole income? 
If we knew what had happened in the past we 
might have some guide for our expectations 

for the future. 

Such statistics as are available suggest that 
the proportion has been nearly stationary for 
inhabitants of the United Kingdom during the 
last half -century. But this does not take us 
very far. The inhabitants of the United 
Kingdom are a special class which may not 
be typical of the whole world in this respect. 
Moreover, the period is too short to be of much 
weight. Looking at the matter with a long 
sweep of vision back to the earliest age in 
which we can regard property as existing at 
all, we can scarcely doubt that property's pro- 
portion has increased. In ordinary seasons 
labour brought in sufficient return to maintain 
the workers somehow, though no doubt not in 
a very luxurious manner ; it is difficult to 
believe that on the top of this there was a 40 or 
50 per cent, surplus for owners of property. 
The property was small ; the land was there, 
but only slightly improved ; the houses of the 
mass of the people were hastily -built huts, 
which have mouldered and blown away without 
leaving so much as a slight elevation of the 
soil on their sites ; the means of communica- 
tion were grass tracks, over which every man 
travelled on foot or on horseback ; machinery 
for making goods scarcely existed. It is im- 
possible to believe that the owners of such 


property as existed received as large a pro- 
portion of the whole income as they do to-day. 
While it is thus probable that the proportion 
falling to property has increased, it is Ppssjble 
that the position of the average individual 
worker has improved in comparison with that 
of the average individual owner of property. 
Though there is no doubt a greater space than 
ever between the average worker and the richest 
man in the world, the increase in the absolute 
amount of the income derived from property has 
been so widely spread that it is quite possible 
that the increase per head is not so large in 
proportion to previous income as the increase 
in earnings per head has been. In this cal- 
culation we are thinking of workers and owners 
as such, so that a single person may appear 
in it both as worker and as owner. If we drop 
this abstraction and ask ourselves what is likely 
to be the effect of a growth in the proportion 
falling to property, we find much depends upon 
the diffusion of this proportion. If a tew 
individuals get the whole increase, this will 
be more unsatisfactory than if the increase is 
widely spread. 




Why do some people have property from which 
the owner can draw a large income without 
appreciable exertion on his own part, while 
other people have less such property, and many 
none at all ? Here the principal cause clearly 
is the fact that all persons do not receive equal 
amounts of property by way of inheritance and 
bequest. Some receive enormous amounts and 
others small amounts, while the great majority 
receive nothing at all. Thinking of particular 
individuals we regard this as a matter of luck. 
It has always been thought simply lucky to 
be '* born with a silver spoon in your mouth." 
The heir of a large property is " fortunate," 
and sometimes his property is even called his 
" fortune." But it is not chance which causes 
greater inequality from this cause to prevail 
at one time or place than at another. One set 
of conditions will produce more inequality than 

Where there is not much property, there 
cannot be much inequality of inheritance. 
Consequently, under primitive conditions the 
inequality from this cause is unimportant. 
Each generation then receives little from its 
predecessor, and the inequalities which arise 

from unequal inheritances are small compared 



with the inequalities which arise from the same 
cause when generation after generation has 
accumulated property in the shape of improved 
land, buildings, and instruments of all kinds. 
Hence, even in our own time we pn see a 
difference between what we call the " old 'and 
the " new " countries. The inequality which 
arises from unequal inheritance is much more 
marked in Europe than in North and South 
America or Australia. The American, H. R. 
Seager, said in 1904 : " So long as a fair degree 
of equality of economic opportunity is pre- 
served, the influences which make for the disin- 
tegration of large accumulations of wealth are 
likely to predominate, and the very rich men 
of each generation are likely to be those who 
have acquired the greater part of their fortunes 
during their own lifetimes. This has been the 
case in the United States up to the present time, 
and there is nothing in the practice of paying 
interest and rent for the use of property fairly 
acquired that threatens to make it less the case 
in the future." But in his 1913 edition he 
decided to omit this passage. As the United 
States ceases to be a " new " country, more and 
more property will be inherited in proportion 
to that which is acquired in the lifetime of a 
generation, and there will consequently be more 
scope for inequality of inheritance. Already 
the Astor and the Vanderbilt families show that 
the process of assimilation of American to 
European conditions has made considerable 
progress. America may be free from inequali- 
ties arising from grants of land made by 
William the Conqueror, but it is just as easy to 
be the lucky inheritor of a farm which becomes 
part of the site of a great city there as in 




England. The Astor inheritance in America 
has the same source as the Grosvenor inherit- 
ance in England, and the Vanderbilt and 
Morgan millions are no more likely to " disin- 
tegrate " than those of the Rothschilds. We 
may take it that mere continuance of prosperity 
is likely to increase the inequality of incomes 
resulting from inequality of inheritance. 

But variations of law and custom exercise an 
influence, and may exercise greater influence 
in the future. Primogeniture, strictly carried 
out, and applicable to the only important kind 
of property, no doubt kept the inequality 
greater than it would have been under a system 
of equal division between children. In our 
own time primogeniture plays but a small part : 
property as a whole is generally divided nearly 
equally between a man's children by his will, 
except when the eldest has a title, and, there- 
fore, it is supposed, some state to support. The 
restrictions on freedom of disposition between 
the testator's children and others which prevail 
in many European countries probably exercise 
but little real influence, and merely compel 
what would almost always be done voluntarily. 
More important is the state of opinion about 
marriages between one class and another, 
which, in modern civilization, practically means 
between persons belonging to rich and persons 
belonging to poor families. If there is much 
intermarriage between the children of the rich 
and the children of the poor, there will clearly 
be a more equal distribution of inherited pro- 
perty than if the children of the rich marry 
none but their own class. Another most impor- 
tant factor is the relative number of surviving 
children among rich and poor. If every 



millionaire had twenty children, there would 
be much more " disintegration " of great for- 
tunes than if he had only one or two. So tar 
this subject has been very Uttle discussed, and 
very little is known about it. J. S. Mill alone 
of the older writers thought it worthy of consi- 
deration, and not much has been added since 

his time. . . 

Along with differences of income arising 
from unequal inheritances and bequests we must 
place differences arising from unequal gifts 
frcm the living to the living—gifts inter vivos 
as it is commonly expressed. Gifts are not, 
as we have seen, themselves regarded as 
income, but when property has once been 
handed over from one person to another, so 
that the giver has no longer any control over 
it, then the income which the property yields 
is of course income to the person who receives 
the gift. Such gifts of property are not made 
to any great extent. People who wish to give 
usually prefer to retain the ownership of the 
property and give away the income from time 
to time, so that they can if they please at any 
moment revise their donation. But transfers 
of the property are considerably encouraged 
by the heavy taxes levied on inheritances in 
recent times. They are made chiefly to per- 
sons who would have received the property 
by way of bequest or inheritance a little later, 
and are consequently subject to just the same 
influences as inheritances, and the reasons for 
their inequality are the same. 

The second great cause of inequality ot 
income from property is inequality of saving. 
Some save much, others save little, and others 
noching at all. If those who had little pro- 


i ■ 



perty saved much, and those who had much 
saved nothing, or exercised negative saving 
by spending more than their incomes, inequality 
of saving would, of course, not be a cause of 
inequality, but rather a cause tending to greater 
equality. But as a matter of fact it is the rich 
who save most, both in absolute amount and 
in proportion to their incomes, so that saving 
does not mitigate inequality arising from other 
causes, but aggravates it. The amount of a 
man's savings de])ends upon his power and his 
will to save. His power depends upon the 
magnitude of his income less any claims on 
it which have to be met whether he likes it or 
not, and upon the length of the time during 
which he has commanded the income. We 
do not expect to find that a young person with 
a small income to start with has saved much, 
especially if his mother has made him con- 
tribute a good deal to the support of the family. 
We do expect a man who started with a good 
income a long time ago and who had no great 
claims upon him to have saved a great deal if 
we know that he desired to save. If inequality 
in the desire to save were arranged so that 
those who had the least power to save had 
the most desire to do so, this might, of course, 
counteract to an appreciable extent the results 
of unequal power to save. But there is no 
reason for supposing any such providential dis- 
tribution of desire to save, and therefore on 
the whole we must regard saving as actually 
operating to increase rather than decrease 
inequality of incomes. 

It must be remembered, too, that the educa- 
tion and training of children is a quasi -invest- 
ment which competes with saving in the 



ordinary sense of the word. As there is no 
object in spending more than a particular 
limited amount in this direction, it follows that 
cost of training will absorb a larger propor- 
tion of potential savings in the case of parents 
with moderate means than in that of very 
wealthy parents, thus leaving a less proportion 
for savings in the ordinary sense. 

The third great cause of inequality of income 
from property is the fact that the income 
derived from particular property is liable to 
change from all sorts of causes which are 
beyond human foresight. If all property came 
to its possessors by inheritance, it is not clear 
that this liability to unforeseen appreciation and 
depreciation would increase inequality : it a 
number of persons are given unequal amounts 
by chance, and then some other chance dis- 
turbs these amounts, there is no reason for 
supposing that the second distribution will be 
more unequal than the first. But as a large 
amount of property is obtained by savings from 
earnings, and earnings are not altogether a 
matter of chance, but are largely subject to 
certain obvious rules, it follows that chance 
changes in the income derived from particular 
property do aggravate inequality. Two men 
earn equal amounts because they are of about 
equal ability and industry and work at the same 
trade : they save equal amounts, and invest 
with what good authorities would consider 
equal judgment, but the investment of the one 
turns out fortunate and that of the other unfor- 
tunate. The one becomes rich and the other 
remains poor. 





Why do some people receive large incomes 
in consequence of their performance of labour, 
others only small incomes, and others none 
at all? 

This is not, as is sometimes erroneously 
said, all a question of value. Earnings differ 
not only because of differences in the value of 
a definite amount of service rendered by the 
worker, but also because of differences in the 
amount of the service rendered. It is obvious 
enough to all of us in private life that the 
comparative earnings of different individuals 
depend very largely on the comparative 
amount of labour which they perform. One 
man works hard, is " industrious " as we 
say, and earns a good annual income in conse- 
quence, another is lazy, rather enjoys being 
out of a job, and consequently earns very little. 
The only reason why this very important fact 
is often ignored in economic treatises is that 
it is so obvious that it does not occur to writers 
as worthy of mention. But it is not so obvious 
that the old do not find it constantly necessary 
to insist on it in their exhortations to the 
young. At one period they even thought it 
well to present boys with pocket-handkerchiefs 

1 88 


on which the career of the industrious appren- 
tice to the loftiest commercial position was 
depicted in lurid prints. 

Differences of mdividual output of service 
may of course arise from other causes than 
differences of " industry." Individuals differ 
largely in the physical and mental qualities 
given them by nature, and we expect the more 
capable to earn more in each occupation than 
the less capable, where the more capable and 
the less capable are equal in " industry." Here 
again the only reason for overlooking the truth 
is its extreme obviousness. 

But besides these differences between indi- 
viduals following the same occupation, we find 
differences between whole classes of individuals 
following different occupations. There are 
low paid occupations and high paid occupa- 
tions—or, at any rate, better paid occupations. 
The difference here cannot be entirely attri- 
buted to differences of " industry " and natural 
endowments. Some few of the worst paid 
occupations are, indeed, largely filled up by 
lazy persons of small natural ability, and pos- 
sibly some of the best paid are largely filled 
up by persons of more than the average 
industry and natural endowments. But there 
is little reason for supposing that these proposi- 
tions can be applied to all the poorly paid and 
all the better paid occupations. Most of them 
are filled by very ordinary persons. Moreover, 
even if the propositions did apply, that would 
not account for the difference of remuneration. 
Even if road-sweeping were paid by the piece 
in strict proportion to the amount of service 
rendered, the most industrious and able man 
in the world could not earn £250 per annum 

^ l. 




by it. There is clearly something more at 
the bottom of the differences of earnings as 
between one occupation and another. The 
value of the work of an average person is less 
in some occupations than in others. But why? 

In endeavouring to answer this question it 
will be well to clear away at the outset a deeply 
rooted misconception about the creative power 
of labour. It has been supposed by many 
people during the last two hundred years at 
least that labour creates value, or gives value 
to the things on which it is expended. This 
is an entire mistake. Labour certainly per- 
forms valuable services and produces or creates 
valuable things, but it is not because labour 
is expended upon these services and things 
that they are valuable. The proposition should 
be reversed : it is because it is known that the 
services and things will be valuable that labour 
is expended in producing them. This is quite 
obvious when we reflect that no "amount of 
labour expended on a thing which is not wanted 
by any one will make it valuable, and that if 
the labour employed in producing some valu- 
able service or thing is increased with the effect 
of causing more of the service or thing to 
be forthcoming, its value will fall. In fact, it 
would be truer to say that labour destroys 
value than that it creates it : every minute of 
labour given to the production of anything 
tends to reduce the value of such things by 
increasing their quantity. Labour then is 
generally remunerated, not because it creates 
value, but because it is generally devoted to 
the creation of services and things which are 

Bearing this in mind, we can still see some 


foundation for the assumption, often made, 
consciously or unconsciously, that in the 
absence of reasons to the contrary we should 
expect all kinds of labour to receive equal 
remuneration. We should expect it, not 
because labour creates value, and therefore the 
product of equal quantities of labour should be 
of equal value, but because we should expect 
people to sort themselves out between the 
different kinds of labour in such a way that the 
services rendered by an hour of labour of each 
different kind would be equal in value. We 
should expect that as soon as any one kind of 
labour appeared to be better paid than another, 
people would crowd into the better paid occu- 
pation till the increase of the service offered 
brought down the remuneration to the general 
level. Freedom to choose and change an 
occupation would maintain one level through- 
out all occupations. 

In fact, of course, this single level is not 
found to exist. 

In the first place it is obvious that there must 
be frequent temporary departures from any such 
level in consequence of the abrupt and unex- 
pected changes which take place in demand and 
in the knowledge of methods and the possession 
of means of production. Owiqg to all kinds of 
reasons the demand for any particular product 
is subject to considerable variations which no 
man can be expected to foresee or, at any rate, 
which the large number of persons concerned 
certainly do not as a matter of fact foresee. 
New methods of production are constantly 
being discovered which diminish or increase 
suddenly the demand for particular products of 
labour, though the demand for the ultimate 




result remains the same : for exarnple, the 
invention of petrol -driven cars diminished the 
demand for persons capable of driving and 
taking care of horses, though it did not 
diminish the demand for the service of carry- 
ing passengers by road. Climatic variations 
constantly lead to a shortage or a superabun- 
dance of particular products, with the result 
of diminishing or increasing the demand for 
the services of particular classes of workers. 
All these changes, however, would not create 
any permanent differences between different 
occupations. It is a matter of luck whether 
one occupation or another is affected by them, 
and so in the long run we should expect sub- 
stantial equality between all the various 
occupations so far as these causes were 

Some changes, nevertheless, are " always 
going on " : they are not, like those just dis- 
cussed, beyond human foresight. Such is the 
change which, throughout modern history, has 
caused agricultural labour to be a declining 
proportion of the whole of industry. So far, 
the returns to agricultural industry have steadily 
increased, and as Adam Smith remarks, " the 
desire of food is limited in every man by the 
narrow capacity of the human stomach." Con- 
sequently, the fact that it has become easier 
to produce food for the number of human 
beings which has actually existed at any 
moment has led to a smaller proportion of 
human effort being required for the production 
of food. Isolated Man in such conditions 
would have found some of his time set Tree 
from the production of food, and would have 
been able to devote the time saved either to 


increased leisure or to larger production of 
other things. Associated men find that a 
smaller proportion of their number suffices to 
feed the whole. Agriculture, therefore, offers 
a less expanding field of employment than other 
occupations taken as a whole. Though this 
phenomenon can scarcely be described as 
beyond human foresight like an earthquake or 
an abnormal drought, it is a thing which, down 
at any rate to the present or very recent times, 
individuals could scarcely be expected to 
provide for by any action. Agricultural workers 
have thus been at a steady continuing disad- 
vantage compared with workers in general : 
the conditions under which they live having 
been more favourable for the bringing up of 
children than those of many other workers, 
there has always been an over -supply of young 
persons available for agriculture. Many of 
them have, of course, been kept out of agricul- 
ture, and have supplied would-be reformers 
with the theme of " the exodus from the 
country to the towns," but their extrusion has 
been an effort which has been inevitably 
depressing to country labour. 

Secondly, it is probable, we can scarcely say 
more, that the persons following certain occu- 
pations are worse off than others owing to a 
permanent tendency on the part of ordinary 
mankind to miscalculate chances. Adam Smith 
thought that people generally overrate their 
chances of exceptional good luck in such a way 
that they overcrowd the occupations which offer 
a few very high prizes. He says very justly : 
" That the chance of gain is naturally over- 
valued, we may learn from the universal success 
of lotteries. The world neither saw, nor ever 




will see, a perfectly fair lottery, or one in which 
the whole gain compensated the whole loss ; 
because the undertaker could make nothing by 
it. In the state lotteries the tickets are really 
not worth the price which is paid by the 
original subscribers, and yet commonly sell in 
the market for 20, 30, and sometimes 40 per 
cent, advance. The vain hope of gaining some 
of the great prizes is the sole cause of this 
demand. The soberest people scarce look upon 
it as a folly to pay a small sum for the chance 
of gaining ten or twenty thousand pounds; 
though they know that even that small sum is 
perhaps 20 or 30 per cent, more than the 
chance is worth. In a lottery in which no 
prize exceeded twenty pounds, though in other 
respects it approached much nearer to a per- 
fectly fair one than the common state lotteries, 
there would not be the same demand for tickets. 
In order to have a better chance for some of 
the great prizes, some people purchase several 
tickets, and others small shares in a still greater 
number. There is not, however, a more certain 
proposition in mathematics, than that the more 
tickets you adventure upon, the more likely 
you are to be a loser. Adventure upon all the 
tickets in the lottery, and you lose for certain ; 
and the greater the number of your tickets, 
the nearer you approach to this certainty." 

In the choice of a profession, as he 
recognizes, not only overestimation of luck but 
also overestimation of their own ability makes 
young people over-inclined to think themselves 
suitable for the Bar and other professions where 
high ability meets with a very high remunera- 
tion. Hence, owing to this cause taken by 
itself, such professions tend to be overcrowded, 


and therefore worse remunerated than others, 
though of course other causes may overcome 
this tendency and render them actually better 

Thirdly, we must notice that pecuniary re- 
muneration is not the only thing which people 
with free choice between occupations think it 
worth while to consider. They are guided 
also by their estimate of the agreeableness or 
disagreeableness of the work to be done and 
the various conditions accompanying it. If 
all kinds of work were equally remunerated, 
there would be no supply to the most disagree- 
able : every one would of course choose the 
most agreeable. The natural tendency to 
choose the agreeable and avoid the disagreeable 
in fact keeps down the pecuniary remuneration 
of the agreeable by increasing the supply of 
labour, and keeps up the pecuniary remunera- 
tion of the disagreeable by diminishing the 
supply of labour. In occupations of what we 
call " the same class," this effect is very 
obvious. For example, while successful author- 
ship in a few fields of literature is certainly 
highly paid, respectable average authorship 
receives what would be considered an almost 
incredibly low wage if the remuneration is 
worked out per hour of all the effort expended. 

Fourthly, remuneration per hour is not the 
only thing to be considered in the choice of an 
occupation even when the choice is simply 
between occupations in which each hour's 
labour may be reckoned of equal agreeable- 
ness. People have to think also of the number 
of hours of labour which can be put in during 
a period of some considerable duration, such 
as a year. If we found an occupation which 



l.s 1 



could not, owing to climatic or other reasons, 
be carried on for certain months in the year, 
during which it was impossible for those 
employed in it to find other equally well-paid 
employment, we should expect the supply of 
that kind of labour to be small enough to raise 
its remuneration per hour somewhat above that 
of other occupations of the same class in which 
employment was more continuous throughout 
the year. We should not necessarily expect 
the excess to be just and only just sufficient 
to bring out an equal average for the whole 
year, since on the one hand the holiday might 
be regarded as a certain advantage, or on the 
other hand Adam Smith might be right in 
supposing that the anxieties of the workless 
period would be more deterrent than the possi- 
bility of using it as a holiday would be 

Fifthly, we must remember that we reckon 
remuneration per hour as " net " in the sense 
that we allow for any continuing present ex- 
penses, such as the upkeep of tools supplied by 
the worker, but that we do not allow anything 
for the expenses of original education or train- 
ing required by the worker in order to fit 
him for his particular occupation. Now this 
varies enormously between different occu- 
pations, and we should consequently expect Very 
great differences of remuneration, calculated 
in the ordinary way without taking account 
of this particular cost. We should expect, for 
example, that well -trained dentists would be 
better paid than well -trained navvies. The 
navvy would probably begin to earn something 
at fourteen or fifteen years of age, while the 
dentist could scarcely begin before twenty -five, 



so that there is a great difference in the cost 
of maintenance accumulated at compound 
interest when working life begins. On the top 
of that there is the special cost of training, 
which would be nil for the navvy and s,ome 
hundreds of pounds for the dentist. The two 
amounts would have to be paid off out of earn- 
ings in about equal periods. If we take the 
working life of both occupations at thirty years, 
and the rate of interest at 4 per cent., the 
dentist ought to earn aboat £58 a year more 
than the navvy for every £1,000 by which his 
original cost of maintenance and training 
exceeded that of the navvy. 

If this were all, and if we took cost of train- 
ing as a deduction to be made at its face value, 
we might say that the differences of income 
received from labour in different occupations, 
so far as not accounted for by the miscalcu- 
lations into which fallible human beings are 
necessarily liable to fall, were apparent rather 
than real for the most part, and that so far as 
they were real they were balanced by differ- 
ences in non-pecuniary advantages and dis- 
advantages. Thus there would be nearly a 
realization of the state of things pictured in 
Adam Smith's famous passage : — 

" The whole of the advantages and disad- 
vantages of the different employments of 
labour . . . must in the same neighbourhood 
be either perfectly equal or continually tending 
to equality. If, in the same neighbourhood, 
there was any employment evidently either 
more or less advantageous than the rest, so 
many people would crowd into it in the one 
case, and so many would desert it in the other, 
that its advantages would soon return to the 







level of other employments. This at least 
would be the case in a society where things 
were left to follow their natural course, where 
there was perfect liberty, and where every man 
was perfectly free both to choose what occupa- 
tion he thought proper, and to change it as 
often as he thought proper. Every man's 
interest would prompt him to seek the ad- 
vantageous and to shun the disadvantageous 

We should have to remember, however, that 
in this method of reckoning we should be 
understanding " advantageous " and " disad- 
vantageous " in a somewhat unusual sense 
which would be likely to mislead unless care- 
fully explained. We do not usually reckon the 
advantageousness of an occupation as, so to 
speak, net, after the deduction of cost of train- 
ing. Being accustomed to see this cost 
defrayed, not by the person who takes up the 
occupation himself, but by his parents or by 
some charitable institution or by the state, we 
are not in the habit of regarding it as a dis- 
advantage of the occupation. It is as a matter 
of fact no disadvantage to the person who 
pursues an occupation that some other person 
or institution had to pay for his training, unless 
he would have got the money if it had not 
been so spent. Doubtless where the cost is 
defrayed by parents this would often be the 
case, but there is no certainty about it, and we 
are consequently inclined to overlook the cost 
of training when we compare the advantages of 
different occupations. 

Even now we are far from having probed the 
subject to the bottom. Even if we do reckon 
expense of training as a disadvantage, differ- 



ences of earnings between different occupations 
cannot be entirely accounted for by differences 
of advantages other than earnings. Every one 
knows that the whole or net advantageous- 
ness of different employments is highly 
unequal. If equality prevailed, we should find 
well-to-do parents in doubt whether to make 
their sons civil engineers or naval stokers, 
doctors or road-sweepers. What we do find 
is a persistent, sometimes almost frantic effort 
on the part of all well-disposed parents to get 
their children fitted by training for a " class 
of employment " as good as or better than they 
themselves have followed, even if they have to 
pay the whole cost. They know very well that 
in the average of cases it " pays " much better 
in the interest of the child to spend money in 
this way than to put it into ordinary invest- 
ments for his benefit. 

It may be asked, " If this is so, why is not 
money spent in training more young people 
for the occupations of superior advantageous- 
ness until the competition reduces this excess 
of advantageousness to nil?" The answer is 
that the conditions of human life have not 
hitherto allowed the spending of money m this 
way to become an ordinary investment to 
which savings can be attracted in the ordinary 
way by the expectation of interest. They have 
not done so because Society has not thought 
fit to provide means by which money could 
be advanced to young people for their training 
on terms which would make the lenders secure 
of recovering their money with interest. In 
order to make them secure it would be neces- 
sary to legalize contracts under which children 
and young persons would undertake to repay 




money advanced for their education, and it 
would be necessary to provide machinery for 
the enforcement of such contracts. There 
would be great difficulties about this, as such 
contracts would be of the same nature as the 
contract under which a man sells himself into 
slavery, a thmg which is regarded as " against 
public policy," to use the phrase of English 
law courts. Whether it is possible or impos- 
sible to provide facilities for commercial invest- 
ment in the training of human beings, they 
are not provided at present, and consequently 
this business has been left to parents, charit- 
able persons and institutions, the Church and 
the State, who carry it on now, as always, 
in rather a haphazard manner. Parents spend 
money on their children's training and face 
postponement of the children's beginning to 
earn because they think it will " pay " 
from the children's point of view. If there 
were enough well-disposed parents with 
adequate means, therefore, the absence of 
commercial investment would not matter • 
enough young people would be trained for all 
occupations, however great the expense of 
training, to bring all to a common level of 
total advantageousness. There are, however, 
in fact not enough well-disposed parents with 
adequate means, and there is in consequence 
a permanently insufficient supply of persons 
trained to the occupations which require expen- 
sive training, and this short supply keeps the 
whole advantageousness of those occupations 
higher than that of the other occupations for 
which no expensive training or long postpone- 
ment of earnings is necessary. The insuf- 
ficiency of well-disposed parents with adequate 


means is to some extent counterbalanced by 
the working of the numerous charitable endow- 
ments of education which exist in civilized 
countries : the institutions to which these en- 
dowments belong act as fosterparents with 
adequate means. The Churches and the State, 
too, have done a little in recent times in this 
direction. But the Churches have never had 
the economic advancement of their charges 
primarily in view ; they have taught in order 
that children might learn to read the Bible, 
or in order to prevent them falling into the 
hands of the irreligious or schismatic. The 
States have taken up education from motives 
which are complex and difficult to analyse, but 
it may be said quite safely that none of them 
have ever been moved by a desire to cheapen 
the products of the " better -class employ- 
ments " by multiplying the persons qualified 
to pursue them. Consequently, while the charit- 
able endowments of universities and upper-class 
schools have had an important influence in 
reducing the remuneration and cheapening the 
products of the better paid employments, the 
eft'orts of the Churches and the States have 
rather resulted in diminishing the remuneration 
and cheapening the products of the class of 
labour which requires a smattering of letters, 
but is scarcely above, if it is at all above the 
average. Attempts to introduce training for 
higher paid employment of a manual character 
usually encounter trade-union opposition. The 
trade-unionist of a skilled trade is in favour of 
steps being taken to break down the monopoly 
of the professional classes, but naturally objects 
to anything which makes it easier for the 
lowest class to break into his own circle. 



1 he result is that the remuneration of labour 
IS much more an hereditary matter than it 
would be if heredity only played its part by 
brmgmg infants with different original powers 
and qualities into being. Surroundings as well 
as innate qualities are hereditary. There are no 
absolutely insurmountable barriers preventing 
those who are born into poor surroundings from 
forcmg their way into the best paid professions 
if they have exceptional ability and grit, and 
there is nothing to prevent exceptionally in- 
capable persons born into good surroundings 
from falling into the lowest class of workers. 
But all the same, it is, as every one knows, a 
great advantage to the ordinary person in the 
matter of earning his living, to be the child of 
fairly well-to-do parents, and an enormous dis- 
advantage to be the child of parents belonging 
to the poorest class. 

Whether a child is born to parents who are 
well-to-do or to parents who are poor, it is an 
economic advantage to be born a boy rather 
than a^ girl. It is commonly observed that 
women's earnings are considerably lower than 
men's ; it is often said that they do not average 
more than about half. 

Now if there was only one occupation, and 
that occupation required heavy muscular exer- 
tion and none of those qualities in which women 
excel, we should have no hesitation in explain- 
ing the difference of earnings by the smaller 
output of the women. To many men, and 
perhaps to some women, this appears a suffi- 
cient explanation of things as they are. They 
see that in many occupations in which men 
and women compete the women's output is 


measurably less than the men's, and in regard 
to others, in which the output cannot be 
measured by the ounce or the yard, they argue 
that the very fact that men continue to be 
employed along with women, although the men 
earn more money, shows that the men are 
somehow worth more to the employers than the 
women, which must mean that at any rate their 
net produce is greater. This is quite sound 
as far as it goes, but it by no means cov.ers 
the whole ground. There are, no doubt, many 
occupations in which men are superior to 
women. If the less well-paid women s work 
came cheaper to the employer than the mens 
work, women would rapidly, or at the least 
slowly drive out men, just as men wou d drive 
out women if men's work were the cheaper: 
the employers who declined to move would be 
driven out by those who did. But there are 
also employments in which women are superior 
to men— to take an example about which no 
one has any doubt, we may give as an instance 
the care of children. In such occupations men 
do not compete, and if they tried to do so they 
would get few situations, even if they ottered 
themselves at rates immensely below those at 
present earned by the women. The reason 
obviously is that in these occupations the men s 
output would be much inferior to the women s. 
Yet here, too, we find women's earnings 
low as compared with men's. We cannot com- 
pare them with the non-existent men's earnings 
in the same occupation ; we must compare 
them with the earnings of men employed in 
occupations of the same class, in the sense ot 
occupations which were open to the particular 
women in question (both men and women being 





employed), or which would have been open 
to their choice if they had been born boys 
(men only being employed). It would be 
absurd, for example, to compare the earnings 
of the average children's nurse with the earn- 
mgs which we might suppose her brother might 
make as a nurse, and consequently to declare 
her earnings high. What we must do is to com- 
pare her earnings with the actual earnings of 
her brother in his occupation of, say, carting 
coal, and then we find that her earnings are 
low—at any rate when hours, loss of freedom, 
and other considerations are taken into account! 
Now, it IS clearly no use to say that the woman 
earns less than her brother because she cannot 
heave as much coal ; we might just as well 
say that he should earn less than his sister 
because he cannot wash as much baby. 

The true explanation of the general in- 
feriority of women's earnings, like every true 
explanation of any earnings, must combine the 
consideration of amount of output with the 
consideration of the value of a unit of output. 
The real reason why women's earnings are low 
in occupations in which the ultimate judge, the 
consumer, finds their output superior to men's, 
is to be found in the fact of the restricted 
area of employment offered by these occupa- 
tions in comparison with the number of girls 
choosing them, which of course brings down 
the value of the output. The value of work 
being thus depressed in these occupations, not 
only are men driven out or kept out of them, but 
many girls find they can do as well for them- 
selves by going into occupations in which men 
are superior, although they have to take earnings 
inferior to those of the men. This, of course 


throws us back on the question why the area 
in which women are superior is so restricted. 
Like women, men are only superior withm 
a certain area, but they have no need to invade 
the women's field, whereas the women do need 
to invade theirs. The number of women is 
certainly appreciably greater than that ot men 
in the " old " countries from which there k^ 
migration, but the difference in the world at 
large the real market, cannot be great enough 
to make much difference. It seems clear that 
the field within which women show themselves 
superior to men must be smaller than that in 
which men show themselves superior to women. 
Believers in the generally smaller capacity 
of women may attribute this, in part at any 
rate, simply to that smaller capacity. If women 
are for productive purposes as a whole, in- 
ferior editions of men, it is only natural th^t 
there should be a smaller field of occupation 
in which they excel, although it includes the 
very large occupation of motherhood. but 
even if this be, in part, the explanation it 
certainly is not the whole explanation. ihe 
pressure of competition in the occupations in 
which women are superior would be less than 
it is if it were not for restrictions which prevent 
women from entering many occupations in 
which they could, if allowed to compete, 
succeed better than they do at present in 
occupations in which they are allowed. It 
these forbidden occupations, of which railway 
clerical work in this country is a very obvious 
and important example, were unlocked tor 
women, the women who entered them would be 
withdrawn partly from the occupations in which 
women are superior, and partly from the other 




I ... 


occupations, while, on the other hand, the 
men kept out of the formerly reserved 
occupations would, by their competition in other 
occupations, tend to lower men's earnings, so 
that men's and women's earnings would tend 
to be more equal. 

This enlargement of the field of women's 
employment is probably the most important 
of the means by which women's earnings could 
be raised in comparison with men's. It is 
obstructed not so much by law as by the inertia 
of employers and their fear of inconvenience 
from the active resistance of the men employed 
at present. It is hindered too by the cry for 
equal wages for men and women, as the most 
powerful lever for increasing the opportunities 
of women is taken away if they are not to do 
the work cheaper. It has been assisted by the 
invention of new machinery, such as the tele- 
phone and the typewriter. If such things had 
been invented long ago, and owing to the 
conditions of that time the occupations con- 
nected with them had been made men's em- 
ployments, women would probably have still 
been shut out from them. 

Besides enlargement of the field in which 
women can be employed, there are two other 
important ways in which their earnings might 
be raised. Firstly, the opinion of the con- 
sumer about the comparative quality of things 
produced by men and things produced by 
women might be modified in a direction favour- 
able to women. At present, for example, many 
" consumers " of the service of waiting at table 
appear to regard the service as superior when 
performed by a waiter, even if the waitress 
handles an equal number of dishes with equal 


dexterity and dispatch. Opinions-or prejudices 
-such as these are clearly as capable of being 
changed as opinions about the beauty ot tight 
or loose skirts, or tall hats and ^o^^^f ;^ -."^ 
change of opinion or taste might have quite 
an appreciable effect in increasing the demand 
for women's labour and raising their earnmgs^ 
Secondly, women's capacity as compared with 
that of men might easily be raised with the 
effect of increasing their output in the occupa- 
tions in which they compete with men, as 
measured not only by taste but by PO^^.^s avoir- 
dupois or cubic yards. Girls as a rule do not 
have so much spent upon them as boys. It 
they were better fed and trained, their output 
would be bigger than it now is in occupations 
in which they compete with men : their average 
earnings in such occupations would rise more 
nearly to that of men, and their improved 
prospects here would relieve the pressure on 
the special fields in which women only are em- 
ployed because they are superior to men 
These special fields might even be somewhat 
increased in area, as the rise in the capacity 
of women might add to the hst In some 
occupations women may be just a httle inferior 
to men at present, and a small rise ^ capaci y 
might make them more than equal. It should 
be noticed, however, that an increase of 
women's output, if it was confined to the em- 
ployments in which women alone are at present 
employed, might very probably reduce their 
earnings by cheapening the unit of output more 
than the amount per head increased. 

The disparity of incomes between the sexes 
is one of the two most prominent features in 




the inequality of the distribution of income, 
ine other is the hereditary character of the in- 
equahty. Any one can see that the distribution 
ot income depends largely on the unequal in- 
heritance of those natural qualities which enable 
one person to get more than another either by 
ordinary labour or by better judgment in the 
management of his property. Careful analysis 
shows that acquired qualities which have the 
same effects are also in great measure heredi- 
tary, owing to the fact that the children of 
well-to-do parents have much better oppor- 
tunities of acquiring them than the children of 
poor parents. On the top of this comes the fact 
that property is mostly acquired by way of 
mheritance, and that it is easier for a person 
to acquire more by saving when he has already 
acquired a great deal by inheritance. The 
result is that when persons are arranged in a 
scale of incomes from the highest to the lowest 
the receivers of the high incomes are easily 
seen to be chiefly the children of those of the 
last generation who received in their time the 
high incomes of that time, and the receivers 
ot the small incomes to be chiefly the children 
ot those of the last generation who received 
small incomes. There are no clear-cut classes, 
no definite boundaries over which no man may 
step. The able members of the poorest class 
are constamly rising to the top, and the par- 
ticularly incompetent members of the richest 
c ass are constantly falling to the bottom • but 
all the same, among the bulk of mankind there 
is a continuous hereditary transmission of in- 
equality of income the importance of which it 
IS foolish to ignore. 



For many purposes we are in the habit of 
accepting incomes as a rough measure of the 
material welfare or wealth of the persons 
receiving them. Of course, we remember that 
a very large proportion of the normal popula- 
tion — namely, children and others who are not 
" independent " — obviously enjoy wealth not 
founded on their own income, since they receive 
the benefit of some other person's income. 
But even when we are dealing with ** indepen- 
dent " persons living at the same time and in 
the same place, we constantly find it necessary 
to modify the conclusion to which a bare com- 
parison of figures of income would bring us. 

Firstly, as has already been pointed out 
(pp. 140-43), income, at any rate as ordinarily 
understood, does not cover all the material 
benefits which people get from their own and 
their family's labour and property. Generally, 
it may perhaps be said that this is not of great 
importance, since the uncovered benefits will 
be approximately proportionate to the incomes, 
so that their omission will not seriously vitiate 
a comparison of wealth or material welfare 
based on income. But often this is not 









true. It would, for example, be misleading 
to treat two groups of working families with 
equaUncomes as equally well off if in the one 
case part of the income was obtamed by the 
mothers going out to work in factories, while in 
[Se othef cafe the whole of the income wus 
obtained without that resource, so that tne 
mothers were able to spend their whole time 
caring for the children and making honie-hte 
comfortable. Hasty calculations based on 
income alone often vitiate comparisons ot the 
wealth of persons living under rural conditions 
with that of persons living in towns, because 
the rural people do for themselves many things 
which have to be paid for out of income in he 
towns. The fact that incomes are supplemen ed 
by unreckoned services performed by the 
receiver of the income and his family seems 
on the whole to tend towards making inequality 
of wealth less than inequality of income-to 
alleviate inequality of income, as we may per- 
haps say for shortness-since it is the smaller 
incomes which receive the larger proportionate 
supplements. To be convinced of th>s we need 
only think of the different results of the death 
of the mother, first in a working-class family 
and then in that of a millionaire, while the 
children are still young. The millionaire father 
mav regret his loss, but it will not be an 
economic disaster to him, as it is to the poorer 

f 1 

^ Secondly, comparisons of wealth based on 
incomes alone are vitiated by the fact that 
income is not exclusively applied to benefit 

ts receiver. More than a third of an ordinary 
population consists of children maintained out 
of the incomes of their parents or other rela- 

tions, and it is not much use to try to evade the 
difficuhy by reckoning up some very vague y 
defined "family income," 'so that Bill Smith 
with a wife and five young children and a 
pound a week becomes merely one-seventh 
or some more nicely calculated fraction, ot the 
Smith family with a pound a week. ihis 
method only involves us in an mextricable 
tangle in regard to family incomes, and still 
leafes us with a great mass of transferred 
income on our hands. \ leaves us with all 
charitable expenditure on objects which happen 
to lie outside the definition of the family, all 
expenditure out of income in payment ot taxes, 
and all expenditure for non -economic ends. 
It is far better to recognize frankly that a con- 
siderable portion of income is not employed 
for the material benefit of the recipient of the 
income. Some he parts with because he 
prefers either the material benefit of others 
or some non-economic gain to his own inaterial 
benefit ; other portions he parts with because 
public opinion or the law compels him. It is 
little use to attempt to distinguish sharply be- 
tween what he parts with voluntarily and what 
liTparts with involuntarily. He often makes a 
virtue of necessity, trying, for example, to feel 
a glow of satisfaction as he Parts with his 
subscription to the local hospital, although he 
would not give it if he were not afraid the 
absence of his name might give rise to un- 
pleasant comment. On the other hand, he 
often complains of the necessity of paying rates 
and taxes to defray the cost of things which 
he would willingly buy if they were sold in 
shops, like butcher's meat, instead of being 
provided out of rates and taxes by government. 






The fact that recipients of income part with 
large amounts of it without receiving any 
material return in their own persons can 
scarcely be said either to alleviate or to aggra- 
vate the inequality of income. On the one 
hand, it may be said that the obligation of 
parents to maintain their children aggravates 
the inequality of incomes, inasmuch as it is 
generally the recipients of the smaller incomes 
who have the largest families. But on the 
other hand, the payments out of the incomes of 
one set of people, not for the benefit of their 
families, but for the benefit of a different set of 
people, whether these payments are voluntary 
or enforced by public opinion or by law, are, on 
the whole, transfers from the rich to the poor. 
It is difficult to see how any judgment about 
the net result can be arrived at under present 
conditions, but it seems probable that in future 
times the transfers of the second class will 
increase, while the inequality in the size of 
families is likely to be reduced, so that, on the 
whole, we shall find here an alleviation of 
inequality of incomes. 

Thirdly, a person's wealth or material wel- 
fare, in the usual sense of material welfare 
enjoyed in some short period of time taken 
for comparison, is not affected by any portion 
of income which he saves. If of two men with 
£ioo a year each the one saves £50 and the 
other nothing, the one who saves will enjoy 
less wealth during the time this continues, 
though he may possibly enjoy more in the 
course of his whole life than the other. Even 
if we changed our method of comparison, and 
tried to compare whole lives instead of con- 
fining ourselves to a single year or some such 



period, the different amounts of savmg would 
vitiate comparisons of wealth based on income 
received, since savings are constantly made 
from which the saver does not expect to benefit 
in his own person ; and even if savings were 
all made for the saver's own benefit, dis- 
crepancies between whole -life income and 
whole-life wealth would be occasioned by the 
uncertainty of the duration of life. Presumably 
the savers would buy life annuities, and those 
who lived longest would then get most benefit 
from their savings. 

As at present practised, there can be little 
doubt that saving alleviates inequality of 
incomes to some considerable extent. Well- 
to-do people save money, invest it, and then die 
and leave all their property to their poor rela- 
tions, who straightway sell it (to other saving 
people) and live for some time upon the pro- 
ceeds. The wealthiest class of all can scarcely 
spend the whole of its income in ways which 
will not be more trouble than they are worth : 
it is much less trouble to purchase £10,000 
worth of stock or shares than to maintain a 
third or fourth country house, and the advan- 
tage of a third or fourth country house is 
inconsiderable. So the wealthiest class becomes 
a kind of automatic saving-machine, which pro- 
vides new capital for the world because it finds 
it is less trouble to do so than to spend, the 
advantage of further spending being very small 
after some thousands a year have been spent 
It is clear that out of the incomes of the rich 
a much larger proportion, as well as an enor- 
mously greater amount, is saved than out of the 
incomes of the poor, and, so far as it goes, this 
tends to alleviate inequality of mcome. 




Fourthly, comparisons of wealth based on 
income alone are vitiated by the fact that the 
material wants of individuals differ very greatly, 
owing to original and acquired differences of 
body and mind, and these differences are often 
of such a character as, to prevent equal amounts 
of expenditure yielding the same, or even 
approximately the same, amounts of material 
welfare. One man, from his excessive size or 
some defect of digestion, may require more 
u 1 u°^ "^ore expensive food, to keep him in 
health and strength than another man of 
smaller size and better digestive organs. 
Illness at once upsets comparisons based on 
income : the sick man has to pay for medicine 
and operations which afford him no active 
satisfaction " at all, but only disgust and 
pain. In real life we are perfecdy alive to this. 
it one man is well and another has to pay £200 
a year to doctors and nurses, we never dream 
of supposing that the two men are equally well 
off, enjoy equal material welfare, merely 
because they both have £500 a year. The 
only reason why we are sometimes apt to over- 
look the matter in theoretical generalizations 
IS that we are then usually dealing with large 
classes, and we suppose that individual 
differences may safely be ignored for the 
moment. But the differences in question are 
not altogether a matter of individual idiosyn- 
crasies. They sometimes exist between whole 
classes. For example, the persons engaged in 
a particular occupation may very easily be 
especially liable to some form of sickness which 
makes the average of sickness higher in that 
occupation than in others. It may be, too, that 
some kinds of work actually require for 'their 


efficient performance a greater quantity of food 
or a better quality of food than is sufficient to 
give equal " satisfaction " to persons engaged 
in other kinds of work. 

The fact of inequality of wants is a great 
aggravation of the inequality of income. If 
inequality of income corresponded with in- 
equality of wants, so that those who had the 
greatest wants had also the greatest incomes, 
material welfare would be much more equal 
than incomes. But just the contrary is true: 
not only is there no correspondence between 
income and wants, but the rule for the whole 
working population is rather that when wants 
are greatest, owing to sickness, childbirth, or 
infirmity, income is wholly absent. This has 
been recognized for thousands of years, and 
well-disposed persons have endeavoured to 
supply the place of income by charitable gifts, 
poor laws, and insurance schemes. Children, 
too, have no income, though their wants are 
considerable, and without the institution of the 
family the rest of the economic system could 
not have preserved the human race. 

Fifthly, even where wants are the same, equal 
amounts of income may yield different amounts 
of material welfare, owing to the fact that 
people are not all equally capable of arranging 
their expenditure in such a way as to satisfy 
those wants as completely as possible with the 
money at their disposal. It is absurd to assume 
that every one's judgment on the question of 
what will benefit him most is infallible. 
Obviously, many people misjudge in a manner 
which seems amazing to other people at the 
time, and often to themselves when they think 
about it after sad experience. They buy too 




much of one thing, such as intoxicating liquor, 
tobacco, or motor-cars, and too little of some 
other things which would have added much 
more to their material welfare. They live too 
much for the moment, and spend money to-day 
which would have produced much more 
material welfare if it had been reserved till 
they were out of work or sick. The well- 
authenticated observation that regular income 
is considerably better for most people than 
a somewhat larger but irregular income testifies 
to the general belief that want of good judg- 
ment in the distribution of means over time is 
a very common phenomenon. 

InequaHty of judgment in expenditure aggra- 
vates inequality of income, since the class with 
the smallest income is likely to be the most 
ignorant, and therefore to have the worst judg- 
ment. All close observers of the poorest class 
know that ignorance of how to use their very 
small opportunities has much to do with their 
continuance in poverty. 

Sixthly, the relative wealth of individuals is 
clearly affected by the conditions under which 
their incomes are acquired as well as by the 
magnitude of those incomes. A man who 
makes £70 a year by easy work in daylight 
certainly enjoys greater wealth than one who 
makes the same amount by hard work under- 
ground for the same number of hours. A man 
with £1,000 a year from investments which 
give him no trouble is usually better off than 
one who has to sit in a city office boring over 
business for sixty hours a week in order to 
acquire the same amount of income. No doubt 
the second man would be less happy if he 
retired and sat on a chair all day, reading the 




newspapers and worrying his wife, but if he 
had the income from investments he would 
not be obliged to adopt that mode of lite ; 
he could choose whatever work he hked best 
and be as active as he pleased It may be 
taken as certain that those who have consider- 
able income from property do not have to sub- 
mit to so much " disagreeableness of labour 
when they earn additional income by working 
as those who have to depend entirely on their 
labour. They can afford to pick and choose, 
and they do so . They need not work so far 
into the realm of fatigue and boredom, and 

thev do not. w u 

the inequality of the conditions under which 
income is obtained is certainly an alleviation ot 
inequality of income when competition makes 
it work simply as a counterpoise, so that one 
occupation giving an income of £100 a year- 
is only as good, on the whole, as another but 
more agreeable one giving £90. The absence 
of fully effective competition, however, prevents 
this balance being universal, and, in fact, we 
find that the worst-paid occupations are also 
the most disagreeable, they being chosen by 
large numbers of people for the same reason- 
inability to choose a better 

Seventhly, even when equality in all the con- 
ditions so far dealt with is present or, what 
comes to the same thing, when differences in 
anv or all of these conditions are allowed lor, an 
important cause of discrepancy between income 
and material welfare or wealth is still left in the 
fact that though the larger an income is the 
larger is the wealth of the recipient, yet the 
increase of wealth is not as a rule proportionate 
to the increase of income. It is useless to 



discuss what is the case below a certain very 
low limit of income necessary for mere sub- 
sistence. When this limit has once been 
reached, a small absolute addition to income, 
such as £io a year, will give a very large 
addition to the wealth of the recipient, because 
it will be spent upon things which make a 
great difference to him. The next £io will 
not be of quite so much importance, and so 
on, till, when we get to the richest man in the 
world, we find that £io more or less per annum 
is an inappreciable sum to him. The more 
income a man has, the more it is spent on com- 
paratively trivial things. So complete has 
popular perception of the fact become that pro- 
gressive taxation is often defended by the aid 
of propositions which imply that, for example, 
one-tenth taken from Smith with £10,000 a 
year means less to him than one -tenth taken 
from Jones with £1,000 a year means to 
Jones, although Smith's tenth is ten times as 
big as Jones's tenth, so that we are expected 
to believe that Smith will " feel " the cutting 
off of £1,000 less than Jones will " feel " the 
cutting off of £100. To estimate precisely the 
acuteness of the feelings of average persons 
with incomes of different amounts appears to 
be scarcely possible, but there can be no doubt 
about the main fact, that material welfare or 
wealth is not proportionate to income, though 
it moves in the same direction — more income 
gives more wealth, but always in a less and 
less proportion. 

This "diminution in the utility of additional 
income as income increases," as it is sometimes 
called, has the important effect of making in- 
equality of income an evil in itself, or, to put 



it in another way, an evil if we disregard the 
ultimate effects of inequality upon the tuture 
action of the persons concerned. Common 
opinion fully recognizes this. Whenever we 
have, without thought of uherior consequences 
in the way of encouragement of mdustry or 
otherwise, to divide a given amount between 
two or more persons who have the same wants, 
we always decide in favour of equal division, 
if there is enough to keep both or all alive. 
We may, indeed, allege that our reason for 
doing so is that it is " fair or just but 
a very little thought will suffice to show that it 
is also economical in the sense of making the 
given amount "go as far as possible. It 
one gets more than the other, the one that gets 
most will be given something which will satisty 
less urgent wants than some of the wants ot ttie 
other person which remain unsatisfied, and 
which might have been satisfied if the division 
had been equal. It is this which is really 
involved in our feeling that the unequal division 
is unfair or unjust. We can see it at once if we 
take a strong case. Let the two persons be 
supposed to have no other means of support 
and the proposition be made that the whole ot 
what is to be given them be given to only one 
of the two. The one who gets nothing will 
clamour for "justice," and the impartial spec- 
tator will sympathize. But why? Evidently 
because the total might have been distributed 
in a way which would have given greater satis- 
faction on the whole-that is, to both persons 
taken together. If there was not enough to 
keep both alive, but only enough for one, it 
would be found that there was no general 
agreement about the demands of justice, and 



the discussion would turn on the comparative 
advantage to the persons themselves and others 
of this or that person's life being saved. The 
popular belief that " it was never intended " 
as the pious sometimes say, or that ''it is not 
right, that some should have so much and 
others so little," has a perfectly sound economic 
foundation. The popularity of progressive 
taxation, especially of progressive death duties 
IS due to perception of the fact that it is 
economical to levy taxes in a way which 
reduces inequality of available means. 
. Kather paradoxically, perhaps, the diminish - 
mg utility of additional income, though it 
makes inequality of income a bad thin^ in 
Itself, undoubtedly tends to alleviate it in the 
sense of making the difference of wealth less 
than the difference of income. If increase of 
income is accompanied hy a less than propor- 
tionate increase of wealth or material welfare 
it IS clear that a man with ten times the income 
ot his neighbour is not ten times as well off 
iivery one knows that this is so, and it is one 
of the most important reasons why the rich, and 
especially the very rich, are not more envied 
than they are. The poorer classes would be 
much more discontented with their lot if thev 
had not a perfectly sound belief that the rich 
do not get very much oat of a great deal of 
their expenditure. 

I do not feel confident that there is much to 
be gained by an attempt to sum up the total 
etlect of all the seven causes of discrepancy 
taken together, but I am inclined to think that 
chieffy in consequence of the powerful effect 
ot the seventh, wealth is not on the whole so 
unequal as income. Possibly we ought to make 



a distinction between different parts o he 
scale. It may be said with ,^°"^'derable plausi- 
bility that those persons who have very small 
incomes or none at all are not so badly off as 
their want of income would indicate, and those 
with very great incomes are not so well on as 
their plenty of income would indicate ; yet 
there may be an intermediate class among 
whkh var^tion in the wants of the individua^ 
and the claims of his family "PO" ^ini is so 
important that differences in wealth beconie 
greater than differences m income. But it 
would be rash to be certain about this. 

So far we have only considered persons 
living at the same place and time. When the 
persons whose wealth is to be compared live 
at different places and times their mcomes are 
still less of a guide to us, smce in proportion 
as the places and times become more and more 
" different," which is nearly equivalent to more 
or less distant, the measure of value in which 
we reckon the magnitude of mcomes becomes 
more and more untrustworthy. The intorma- 
tion that one man has £ i oo a year and another 
£200 in our own country and our own time 
conveys a good deal to us, because we have 
some 'rough^ notion m our minds of what can 
be procured by the two sums. The information 
that two men have those incomes in Siam at the 
present time, or had them in our own country in 
the reign of Henry II, conveys something to 
us, because, though we do not know very weU 
how far the sums mentioned would go in biam 
or would have gone in England m the time 
of Henry II, yet we know at any rate that one 
sum would buy twice as much of the same things 


iX- I 



as the other. But if we are told that one has 

£ln^ .^ ^^'''' '^^ ^'^"^ "^'^ ^"d another has 
a v^nr ^^p' '? ^"?^^"d^ o^ that one had £100 

another h^^r^^ '^ '^^ '^"^^ ^^ H^^^y ^I and 
another has £200 a year in England now 

wfll'br mT\'">^ '^^' '^^ ^^^^ ^ year ^u 
will be able to buy twice as much of the same 

S'To.f .v' ^'""^^ ^'^' ^^^- The vafu^s 
ot most things reckoned in money will be 

£Tr^n'"' r ^1 "^^^ conceivably happen that 
£100 in England would buy all the things that 
would be bought by a man with £100 I year 
sLnl^.f " ^ ^^^^ something over, but such a 
h.Zin. ff . '' ^^''[^ improbable. It usually 
nf^LT I ""' '''"'^ '^^"^^ ^^^ dearer in the one 
ot two places or times and others in the other 
Matisticians try to lump everything together 
by means of what is called an index number 

an men ^^ T ''^">^ ^^^^P ^^^^ "^"^h, since 
fn .. 1 ^ "«t ^ant to buy different things 
in equal proportions. A rich man may think 
prices have not gone up at all when a poor 
man, spending a much larger proportion of 

thinkTT' r ^^'^^ ^"^ ^^^^^ provisions 
thinks they have risen a great deal. More- 
over, in comparing different places, and still 

Tss^blV" ,rr"""^ ^^1^-^^^' ''''''' i^ i^ not 
s^ome of ?h. ."{^P everything together, because 
some of the things present at the one place 
and time will be wholly absent at the o?her 
We now buy even out of quite small incomes 
innumerable things which Henry II could no? 
have bought with the whole nat'ional revenue 
All the same, we need not conclude that com- 
parisons of income relating to different places 
and times are wholly useless. Many different 
places are sufficiently similar to make a com 



parison of income quite a useful starting-point 
for a comparison of wealth : we may not hnd 
a comparison of the incomes of the inhabitants 
of Siam and that of the inhabitants of England 
much use, but a comparison of the same kind 
between France and Germany or Italy is quite 
useful. Similarly, a comparison of incomes 
in the time of Henry II and that of George V 
may be futile, but a comparison of incomes 
between the present time and 1900, or even 
1850 will serve very well, because the kinds 
of things used have not changed very much 
in the interval, and we have a general know- 
ledge of the sort of change which has taken 
place sufficient to enable us to modify our 
conclusions where necessary. 




When serious discussions about the wealth of 
such entities as '* England," ** France," 
" Holland," and " Spain " first began to take 
place, writers usually thought of *' the country " 
rather than of the people of the country. Thus 
a country of great wealth was supposed to 
be one in which there were large quantities of 
the things which were regarded as constituting 
riches, whether the people of the country were 
well-off or not. A very thickly peopled country 
is, of course, likely to have a large aggregate 
of such things in proportion to its area, and a 
thinly peopled country only a small quantity. 
Hence China and India were regarded as enor- 
mously rich, even when it was admitted that 
the peoples of those countries were very poor. 
This kind of comparison is still often made 
between the '* countries " of to-day. We are 
still inclined to speak of a sparsely peopled 
country as " a poor country," even if its few 
inhabitants are very comfortable, unless there 
is something which suggests the potentiality 
of larger numbers in the future. 

The more humane spirit of the eighteenth 
century, however, set up in place of, or perhaps 
we should only say alongside of, the old com- 




parison of " countries " a comparison of 
" nations " in the sense of the persons of whom 
the nations are composed. Berkeley asked in 
1752, in his Querist, "Whether a people can 
be called poor where the common sort are well 
fed, clothed, and lodged? " The opening para- 
graphs of Adam Smith's Inquiry into the Nature 
and Causes of the Wealth of Nations imply that 
a " nation " is more or less wealthy according 
as there is more or less wealth per head for 
the people of whom the nation consists. But 
it is noteworthy that Smith seems to have felt 
that there was something novel in his plan 
of treating the condition of the people as the 
important thing. He asks, much like Berkeley, 
whether an '* improvement in the circumstances 
of the lower ranks of the people is to be 
regarded as an advantage or as an incon- 
veniency to the society," and quite patiently 
points out that these lower ranks make up the 
greater part of the society, and that " what 
improves the condition of the greater part can 
never be regarded as an inconveniency to the 

In our own time no one thinks it necessary 
to argue the question : every one is used to 
comparisons of the wealth of nations being 
based upon estimates of the wealth of the 
people of whom the nation is taken to consist. 

It is, however, worth while to ask ourselves 
exactly what people do constitute nations in the 
economic discussions to which we are accus- 
tomed. In the first place we may notice that 
the old tribal significance of the word " nation " 
has entirely disappeared. We do not attempt 
to compare the wealth of French and German 
citizens wherever they may happen to be. 


■" i 



thp: wealth of nations 

What we do compare is the wealth of the in- 
habitants of France and Germany, whether they 
are citizens or not, and without making any 
attempt to include those citizens who arc living 
abroad. This does not appear to raise any 
really important question. Most citizens living; 
abroad have left their country for good, and, if 
not themselves about to become citizens of the 
country they are inhabiting, will at least have 
children who will be citizens of that country 
and who will eventually inherit their property, 
wherever situated. To attempt to distinguish 
between those who have gone for good and 
those who will return would be useless. 

Secondly, it is worth while to observe that 
the countries of which the inhabitants con- 
stitute the " nations " dealt with are almost 
invariably countries with independent systems 
of customs duties. We nearly always in eco- 
nomic discussions treat the United Kingdom, 
Canada, Australia, and Jamaica as separate 
nations : we treated New South Wales and the 
other Australian colonies as separate nations 
till they were amalgamated in the Common- 
wealth, and then straightway abandoned the 
practice : we never think of treating Massa- 
chusetts and Texas as separate nations, though 
they have better claims to be regarded as 
sovereign States than Jamaica, or even the 
Canadian Dominion. 

It is easy to explain this identification of 
nations with groups of persons surrounded by 
a customs line. The levying of customs, as 
soon as any proper accounts of the amounts 
paid are kept, has always necessarily resulted 
in the collection of statistics of at any rate a 
part of the trade carried on between the people 



inside the boundary and those outside it, and 
these statistics have always become public. 
The natural interest which has been felt in 
them has led to a demand for completeness in 
them, which has eventually induced all the 
most civilized nations to publish annual returns 
which seem to give a very full and accurate 
account of the amount and value of the whole 
of the goods passing in either direction across 
the frontiers, whether taxed or not. The 
publication of these accounts makes people 
think of the people inhabiting each of the 
customs areas as a united whole, trading as a 
single unit, in a way which they do not follow 
when they think of the inhabitants of other 
areas, except occasionally and with a consider- 
able efYort. 

Explanation, however, here as well as else- 
where, must not be mistaken for justification. 
There is clearly no scientific foundation for 
singling out the inhabitants of the areas which 
happen to be within each customs boundary as 
worthy of a consideration which the inhabitants 
of other areas do not receive. There is no good 
reason for assuming that it was impossible to 
say anything useful about the wealth or material 
welfare of the people of Australia before the 
Commonwealth was inaugurated, and that since 
that time it has been impossible to say anything 
useful about the wealth or material welfare 
of the inhabitants of New South Wales and 
Victoria. No doubt customs duties do give a 
certain unity to the inhabitants of the area 
surrounded by the fiscal barrier, but it is only 
the same kind of unity as is given by any other 
common system of taxation, and the fact that it 
exists affords no reason for neglecting the 


I *> 





general question, " What determines the com- 
parative wealth of the inhabitants of different 
territories, whether surrounded by fiscal barriers 
or not? " 

We must begin by a discussion of a some- 
what negative kind in order to get rid of some 
erroneous notions which have long obscured 
the question. 

At one time it was thought by almost 
every one that the great object of national 
economy should be, as it is of individual 
economy, the acquisition of money, and the 
fact that the individual gets his money not to 
keep, but to part with, either in satisfying imme- 
diate needs or in increasing his property, was 
overlooked, so that it was supposed that the 
wealth of a nation depended on its getting 
and retaining, or even continually increasing, 
a stock of gold and silver. It is easy for 
a person with any modern economic training 
to see that a number of individuals living 
together in one territory do not want an un- 
limited amount of money to keep and not to 
spend, any more than a single individual does ; 
and experience has gradually taught us that a 
sufficiency of money will always be found 
where a sound currency is established. But 
even at the present time children and un- 
instructed adults confound money and wealth, 
so that we need not be much surprised that 
even the well educated of past generations did 
so. Still less need we try to prove that no 
such confusion existed in their minds. Is it 
likely that economics is the one science in which 
no progress has been made ? 

Impressed with the belief that " something 



must be done " to secure rrkoney, the statesmen 
of each country at first attempted to turn their 
country into a kind of beetle -trap for the 
reception and retention of precious metal. The 
metals were allowed to come in freely, but laws 
were made against their being carried out of 
the realm. Then this method was attacked 
by people who could not carry on their trade 
easily without exporting bullion. These said 
that export of bullion ought to be allowed,, 
because it would eventually lead to the importa- 
tion of a larger quantity. All that was neces- 
sary, according to them, was to watch the 
" balance of trade," as they called it, very care- 
fully, and regulate the whole trade in such a 
way as to make sure that a balance of bullion 
should come in. They called the balance of 
trade " favourable " when the exports, valued 
at the frontier, exceeded the imports, also 
valued at the frontier : for then, they supposed, 
the balance would be imported in the form 
of bullion. 

The first thing to notice about this balance 
of trade doctrine is that it was never true with- 
out considerable qualification that a " favour- 
able balance of trade " must mean an equivalent 
importation of bullion. It is quite possible 
for a country to have an export of bullion along 
with a favourable balance of trade, and an 
import of bullion along with an unfavourable 
balance. There are disturbing factors, the chief 
of which may be classified as follows : — 

I . The cost of the carriage of the imported 
and exported goods across the intervening dis- 
tance which often separates countries is a dis- 
turbing factor when the values of imports and 
exports are both taken on the coast or frontier 





of the country considered. If there is no such 
intervening distance, there will, of course, be 
no disturbance from this cause. We can 
imagine Dutch merchants standing on one side 
of an imaginary line selling to Belgian mer- 
chants standing on the other side a thousand 
francs' worth of goods, and then, having got 
the thousand francs, promptly laying it out in 
the purchase of a thousand francs' worth of 
goods from the Belgians. In such a case it 
is obvious that all that would have happened 
would be an exchange of Dutch goods worth 
a thousand francs for a thousand francs' 
worth of Belgian goods, and imports and ex- 
ports, valued at the frontier, would appear 
equal, both in Holland and Belgium. But when 
there is an intervening distance between the 
two countries the case is different. In the trade 
between Portugal and Brazil, for example, 
Portuguese ships do not carry the Portuguese 
goods to the middle of the Atlantic and ex- 
change them there for Brazilian goods brought 
by Brazilian ships to the same point. If they 
did, and the values of imports and exports 
were set down at that i:)oint, again the values 
of imports and exports would exactly balance. 
The prices of the exports from Portugal would 
of course be lower on the coast of Portugal 
than in mid-Atlantic, and lower in mid-Atlantic 
than on the coast of Brazil, or it would not 
be worth while to carry them, and for the 
same reason the exports from Brazil would 
be lower-priced on the coast of Brazil than 
in mid-Atlantic, and lower in mid -Atlantic than 
on the coast of I'ortugal : so that, for example, 
wine worth £1 in mid-Atlantic might be worth 
only 19s. on the coast of Portugal and be worth 

£, IS on arrival in Brazil, while coffee which 
las worth %s. when it left Brazil nr.ght sim - 
Tarly rise to £i in mid-Atlant.c and to i-i is. 

on arrival in Portugal. ,i;t„ nf vilues 

This would not destroy the eq-^fl^y .°™<=^j 
But what actually happens is th^* instead ot 
one set of values taken in the middle ot the 
transifof the goods, we have two sets of values 
the one calculated on the coast or "ontier oi 
the one country, and the other calculated on the 
coasror Tronder of the other country : the 
Ctuguese say they have exported 1 9s . worU^ 
nf wine and imported 21s. worth ot conec, 
whik the Brazilians say they have exported 
OS wor'h of coflfee and imported 2.s worth 
ofwine There is clearly no ground for con- 
cluding from this apparent >nequali y ^hat 
either or both countries have lost 2s. in casn 
and we must beware of rushing to the opposite 
and equally fallacious condusu^n that each ot 

ijTothfng Zte or ifs^San the'money value 
of The labour and property used by each country 
hi carrying away the exports and bringing 
back the imports. , . c 

The supposition just ^=^'1'= °^^^'Lfncean 
two countries exchanging goods in mid -ocean 
Ir of course an extravagant one. It is 
'c^isier to suppose the ships of each country 
7o\Z right across the intervening distance and 
fet dividing the whole of the work equally 
between thim. This change of supposi ion 
Sm make no difference whatever : the values 
nf imnorts and exports would still ditter in 
eich country by half the whole cost of the 
carriage of both imports and exports. But 
novv le' us suppose that the Portuguese ships 




provisioned in Portugal do the whole of the 
work, carrying the wine all the way to Brazil 
and bringing back the coffee. Then the 
Brazilians escape the labour and expense of 
rnanning and fitting out a fleet of merchant 
s^ips themselves, but naturally have to pay 
Uie Portuguese, who now do that work for them. 
1 iD^"^^"^^ may be imagined as first paid to 
the Portuguese shipowners in money, just as it 
would have been paid to the Brazilian ship- 
owners when they did the work. But as there 
ifir^^ reason for depicting Brazil of cash and 
nlling up Portugal with cash, we may be 
sure that the money paid will sooner or later 
niter back to Brazil in exchange for exports 
to Portugal, so that the result of Portuguese 
ships and men doing the work is sooner or 
later to increase the quantity of Brazilian 
exports and the quantity of imports into 
lortugal. Consequently, when a country does 
none of the work of carrying its imports and 
exports outside its own boundaries, there will 
be no difference in the values of its imports 
and exports due to cost of carriage, but when, 
on the other hand, a country does the whole 
of the work, then, other things being of course 
supposed equal, its imports will exceed its 
exports by the whole of the cost of carriage 
of both imports and exports. It is this fac;!: 
which accounts for the general tendency of 
imports to exceed exports : if the imports into 
all the countries of the world are calculated in 
this way and added together, they will exceed 
the value of all the exports calculated in the 
same way . 

Sometimes the carrying trade between two 
countries is not in the hands of either country 



but in that of a third country. Then both of 
the first two countries are in the position of 
Brazil in our last example. Exports will go 
from them to the third country to pay its 
denizens for the work done. 

2. Other services besides those involved in 
carrying goods are often performed for people 
living in one country by persons who have 
their home in another country and wish their 
earnings to be remitted home. This leads to 
exports from the first country to the second 
without any corresponding import from the 
second country to the first. Thus an EngUsh- 
man working in India for the Government or 
any other body will be likely to transmit part 
of his earnings to England to support his wife 
and children there, and that will mean exports 
from India and imports into the United 
Kingdom, unbalanced by any corresponding 
imports into India or exports from the United 
Kingdom. When he retires from work in India 
and lives at home on his pension, the effect of 
the transmission of the pension is the same. 

3. Persons living in one country often own 
property in other countries and have the 
interest, dividends, or rents of that property - 
remitted to them. This leads to unbalanced 
exports from the country where the property 
is to the country where the owner is. It is 
the chief cause of the large excess of imports 
into the United Kingdom, France, and 
Germany, countries whose inhabitants own 
large amounts of property in "new" coun- 
tries. It is said to account IFor a quite con- 
siderable amount of imports into Italy, a 
country which attracts rich people from 
America and elsewhere for temporary residence. 





4. Much of the property yielding income 
to persons inhabiting other countries than 
that in which it is situated owes its origin to 
what is called " foreign investment," that is, 
to investment, whether by way of loans, sub- 
scriptions to issues of new shares and stock, or 
purchases of property made by persons in other 
countries than their own. This is another dis- 
turbin'g factor, which works, of course, in the 
opposite direction to the third factor. It causes 
exports from the investing country, which are, 
no doubt, in time usually more than counter- 
balanced by the imports resulting from the 
receipt of income from the property, but which 
are not immediately balanced at all. The 
export of capital, as it is usually called, may 
take place in the form of the actual additions 
to the valuable property in the country in which 
the investment takes place, as, for instance, 
when in consequence of British investment in 
an Argentine railway a British-built locomo- 
tive is bought by the railway company. But 
this is by no means necessary : French investors 
in the Argentine railway might very probably 
cause an export of lace or wine, from the 
sale of which funds would be obtained which 
would be applied to secure the requirements 
of the railway company, either in Argentina or 
somewhere else. 

This disturbing cause is an important cause 
of violent fluctuations in the trade between the 
old countries and the new countries. The 
amount of foreign investment made by the old 
countries is apt to fluctuate considerably owing 
to variations in the prevailing estimate of the 
security of investments in the new countries, 
and the demand for capital from abroad in 


each particular new country is apt to fluctuate 
largely with the policy of its government and 
other local causes. 

Repayment of foreign loans is, ot course, 
merely the same thing as foreign mvestment, 
the investment now being, however, in tne 
direction opposite to 4hat of the original 


c There are various payments ot a non- 
commercial character made by people living 
in one country to people living in another 
country. The stock case is that of a political 
tribute paid, not for any services rendered, but 
simply because the country paying it has at 
some time or other been conquered by the 
country to which it is paid. Whether the 
tribute is a sum of money or an amount ot corn, 
like the Egyptian and Sicilian tributes to Rome, 
it must lead to unbalanced exports from the 
tribute-paying country and unbalanced imports 
into the tribute-receiving country. Political 
tributes are not of much importance in the 
modern world. The examples of non-com- 
mercial international payments which occur to 
us at the beginning of the twentieth century are 
rather the remittances made by Irish emigrants 
to their relations who have remained in 
Ireland, subscriptions made in this country tor 
suft'erers by an Indian famine or a Sicilian 
earthquake, and such part of the dowries ot 
American heiresses married to Europeans as 
is (or is popularly supposed to be) actually 
paid to their European husbands instead 01 
remaining invested in America.^ 

' Some years ago it was usual to endeavour to prove that an 
excess of imports of goods did not necessarily mean an exporta- 
tion of bullion by alleging that the excess was balanced b> the 



nf^ft^r^Tu^ intelligent of the early balance 
ot trade theorists were aware that these allow- 
ances, or rather such of them as were of any 
^FrT, ^"^P«^.^^nce in their time, must be 
made before any inference can be drawn about 
the country s gam or loss of bullion from 
statistics of the imports and exports of goods 
other than bullion, even if those statistics are 
perfectly accurate. They knew also that they 
had no means of estimating the exact amount 
^nH th ,^i°^^"ces which ought to be made, 
and that their statistics of imports and exports 
'!?''''•.. 'T^'K inaccurate. Consequently they 
admitted that exact knowledge of the actual 
balance of trade as between their own and other 
countries could not be obtained from the statis- 
tics which were available, and they were driven 
to seek indications of a favourable or adverse 
balance m the state of the "exchanges" 
1 hese were however, very difficult to intefpret 
owing to the multitude of currencies and the 
bad state of most of the coinages. Modern 
inquirers in regard to the present wouM 
naturally endeavour to solve the question 
whether the bullion of a country was incTeasmg 
or decreasing by referring to statistics of its 
production within the country, if any, and of 
Its importation and exportation. But such 
statistics were not to be had in the seventeenth 
century, and the consequence was that any one 

with 7h!f '^ Ti^^- ^'' fellow-countrymen 
with the bogey of losing their money to the 

''invisible exports." This was a clumsy and confusing? wav 
o treating the matter. It is tolerable in regard to the iiilt Hvo 

t:^''^^Ti::^r ^rr •-" ^e contrived as'^lLlble 
fadors entirely in regard to the other three 



foreigner had a very excellent chance of 

doing so. .,, 

Intelligent or unintelligent, well or Ui- 
informed, the people of the seventeenth century 
were unanimous in being anxious about the 
national stock of precious metals and in think- 
ing that in order to secure a sufficient stock it 
was desirable to encourage exports and dis- 
courage imports of other goods taken as a 
whole. Hence, besides a comparatively un- 
important system of bounties to exports, a vast 
system of intentionally highly restrictive import 
duties hampered trade inwards across national 

boundaries. . . . 

For the purpose of acquiring or retaining 
bullion the whole of this " mercantile system 
as Adam Smith called it, was perfectly futile, 
and this became gradually obvious during the 
eighteenth century. But when a particular 
trade in a country had once been en- 
couraged " by an export bounty, or when its 
" discouragement " had been prevented by the 
imposition of duties upon imported articles 
competing with it, those who were interested in 
it were not likely to give up their advantage 
without protest. They desired to retain it and 
their bias naturally led them to believe that it 
was for the national good that they should do 
so The balance of trade doctrine was replaced 
by the doctrine of "protection," the theory 
that home industries should be " protected from 
foreign competition " either by prohibition of 
competing imports or by "protective " duties.' 

' A duty which " protects ' and consequently may be described 
as "protective" is one which puts upon an imported article a 
charge from which a similar article produced vyithin the country 
is exempt and to advocate such duties is to be a Protectionist 



In the absence of definite argument public 
sympathy is apt to go with a claim for protec- 
tion partly because of the common dislike of 
change, and jiartly because of a feeling like that 
which niduces juries to give extravagant com- 
pensation to persons who have had railway or 

or supporter of Protection. It should he noticed that not 
every duty on nnported articles is protective, because (, is., e 
impor are '' countervailed " by equivalent dutie^ on^ ho! e 

Cw'\ h ' ' ^""^ ^'-^.'^'"P'^*' ^^'^ I^'-if^^i^ customs dutv on beer, 
and (2) because some nnport duties are levied on articles which 
do not compete w,th similar things produced within the country 
eithei because they cannot he produced there at all by any 
amount of expense, or because they cannot be produced tl^re 
at such an expense as would make it worth any^one' while o 
compete w,th the nnported product even whcMi the imported 
product ,s subject to the duty. /.,.., the British dutv on tea is 
not protective, because it is not worth any one's while o 'ow 
onk "d ne ' Ib'TTn""', f'' made-up'soil when the dJty " 
rdsLd'^fo^n ' ' u"^ ^''": '*"^y '"'^'^^ ^^ protective if it were 
raised to 40S per lb. or if some cheaper method of growint/ tea 

here were discovered. It is, of course, the fact of^proteclion 

wL n' '"^f"^'"^ ''^ '''' ""^^'^^'■^ «f ^'^^' ^J"tv, which mat er : 
VV hen vye describe a duty as "protective," we ai'e not to be take 
as deeding he often dilTicult question whether the dutv was 
oi.gmally intended to be protective when it was hrst it m 
perhaps two centuries ago. ^ ' 

The policy which rejects Protection has for many veirs 

i' (Twhfch r7 """r^- '^'"^' '^'"^'^'- ^ ^^'^^ Tradi lountr? 
off \ ] l^ refuses to impose protective duties, and takes the.n 
orf it they come into existence by accident. It is sometimes 

tecticm nir^ r ' '"'^ coun lies which have adopted Pro- 
he rif.rU' ? ""i"' ^"^^^ ''''>' ^'^^-'"^ '^'♦^ • ^^''1''^ i« «'»irf i« that 
tl V" . ^'"^'^°'" •'''' ""'^^n-^^^'^ ^ FreeTrade policv. Sometimes 
too, Protectionists say that the liritish custom duties on tc.'d 

u'e est'rbir^''l""7' '''""' ''"^^" ^^'^'^ '^ ^"--^''y toqu^urel w h 
the es abhshed and convenient usage of words and it would 

be just as reasonable to refuse to caM some Mr. \v ftehead by 
his surname because he had brown hair. Equally sen cless^ 
on the other side, is the practice of the newspaper whid n f^s 
on printing rariH "Reform "thus with inverted comns because 
It thinks the word " reform " can onlv be properly mphe tS 
changes which are good. i i ^"> .i} pneci 10 


tramway accidents or have had their property 
taken for a public purpose, the feeling that it 
will not hurt the numerous shareholders m a 
company or the still more numeroas ratepayers 
in a country or town to pay a few pence each 
as much as it will please the poor sufferer to 
receive a few hundred or a few thousand 
pounds. Besides, it is natural to suppose that 
any industry or trade is a good thing, and 
therefore that it must be bad to allow an exist- 
ing one to be diminished and good to increase 
it or to cause a new one to be set up. ine 
underlving assumption is that the preserved or 
the added industry will be a clear addition to 
what would otherwise exist in the country. 
This assumption that an industry gained by 
Protection will be a net gain, uncounterbalanced 
bv a loss of some other industry, is usually 
based merely upon the simple suggestion that 
if the importation of an article is stopped, there 
will " obviously " be an addition to the popu- 
lation of the country of a number of persons 
equal to that formerly employed in producing 
the article elsewhere. Suppose, for example, 
that typewriters are at present made in America 
and imported into the United Kingdom : it is 
then obvious, say the supporters of this doc- 
trine, that if the importation of typewriters 
into the United Kingdom is stopped, there will 
have to be a number of persons producing type- 
writers in the United Kingdom instead ot in 
America, and there is no reason to suppose that 
there will be any fewer people producing other 
things, so that the typewriter-makers will be 
a net addition. The answer very often given 
to this is " What will become of the people, 
perhaps the printers of bibles, whose products 




were before exported to pay for the type- 
writers?" To that the modern Protectionist 
has a ready answer, " They will continue to 
print bibles for export, since though American 
typewriters are no longer required for the 
British market, the additional population in 
l^ngland will want wheat, tobacco, and other 
things from America." That opens the way 
lor a reductio ad absurdum. "Then, I sup- 
pose, you will proceed to exclude those imports 
n \^" order to add to the British population 
all the people who produce them, and so on 
ad infinitum, or at any rate until the whole 
Anierican population is transferred to the 
United Kingdom?" But the reductio ad 
absurdum is seldom a very satisfactory form 
of exposition. It is better, instead of asking 
what will become of the bible-makers if the 
typewriter-makers come to live in England 
to challenge at once the implied proposition 
that keeping imports out of a country is 
likely to tend to increase its population. 
It IS not in the least likely to increase births 
or immigration nor to decrease deaths or 
emigration. If it had any such tendency, that 
tendency obviously could not be confined to 
the country of the Protectionist who happens at 
the moment to be speaking, and we should 
have the curious result that the population of all 
countries, and therefore of the world as a whole 
could be raised by the abolition of international 

The truth is that the population of a country 
IS likely to be increased by circumstances which 
make it a better country to live in, and there 
is no reason to suppose that restrictions on 
importation generally form such a circum- 


stance, but rather the contrary. Any argument 
which goes to prove that every kind of pro- 
tection everywhere tends to increase the popula- 
tion of the protected area must be wrong. 

It does not, however, follow that it may 
not be possible in some circumstances to devise 
a scheme of particular protection for particular 
products which might tend to keep the popula- 
tion of some particular country higher than 
it otherwise would be. It is clearly possible 
for a State to pay people to come and live in 
a country or to continue to live in it by offer- 
ing them inducements. For example, if the 
State in the United Kingdom or the Union of 
South Africa were to appropriate all the mineral 
property in the country and pay every one who 
chose to reside in it a small pension from the 
proceeds, this would be a clear inducement to 
live in those countries uncounterbalanced by 
taxation of residents as such. It is, I think, 
possij3le that in certain situations a scheme 
of restrictions on particular imports might be 
devised which would have, in a roundabout 
way, the same effect. The scheme would, how- 
ever, involve a reduction of average income, 
since it would cause an increase of numbers 
without a corresponding increase of aggregate 
income.' The subject is full of difficulties, 
and it is clear that nothing of this refined 
character is intended by the protectionist who 
argues that Protection will increase the industry 
of the country. 

He will, indeed, very probably deny that 
he ever thought of increasing the population 

^ Tnlcss, in consequence of very peculiar circumstances and 
extraordinary ingenuity, the whole cost could be thrown on 
absentee owners of property. 







at all. He meant, he may explain, only that 
his scheme would cause the existing popu- 
lation to be more fully employed by doing away 
with those great fluctuations of trade which 
seem to have much to do with the existence 
of the unemployed. There is some truth in 
the idea that reduction of foreign trade as a 
general rule should tend to diminish fluctua- 
tions in employment : on the whole, the smaller 
a trading community is, the less likely is it 
to suffer from such fluctuations, since miscalcu- 
lations with regard to demand and supply are 
less likely, and the effects of changes due to 
invention and alteration of taste are more easily 
seen and are consequently more easily met. 
There is no limit to this advantage, so that 
we should find it greatest when we have 
reduced the trading community to the smallest 
possible size, and then it will strike us that 
isolated Man possesses the advantage in the 
highest possible degree : he has never to fear 
unemployment. But we do not think it worth 
while to become isolated men in order to be 
wholly free from unemployment, and there is 
no reason to think that it is worth while to 
reduce international trade by a trifling amount 
in order to secure a trifling reduction in 

The whole of the ordinary crude doctrine 
that Protection gives employment is usually 
thrown over by the more cultivated Pro- 
tectionist. He has no expectation of giving 
employment by cutting down imports, and 
generally he disclaims any desire to cut down 
imports. He does not advocate indiscriminate 
Protection, but a discriminating Protection 
which will, he thinks, bring about a better 

selection of trades and industries by the people 
of his country than the selection which their 
self-interest will induce them to make in the 
absence of the duties which he proposes. There 
are two possibilities: (i) the country may 
specialize in the directions in which self-interest 
leads in the absence of protective duties, and 
(2) it may specialize in the directions in which 
self-interest leads when influenced by the exist- 
ence of protective duties. Which is likely to 

be best ? 

In answer to this question it is sometimes 
said that the principle of lalsser faire or letting 
people do what they want to do " has been 
Abandoned," or "is dead," and therefore we 
must not suppose that there is any presumption 
in favour of a particular territorial specializa- 
tion being good merely because it is profitable 
for individuals to adopt it. But this is c early 
an error, and a bad error. The whole ot 
civilized society is based on the principle that 
people should be allowed to do what they like 
until good reason is shown to the contrary, and 
this implies a presumption that profitable 
specialization is good. To justify interference 
with it some positive argument must be brought 
forward, showing that it, or the part of it which 
is attacked, is bad. A bare proof that com- 
plete lalsser faire is bad, impossible, and in- 
conceivable does not carry with it a corollary 
that every proposal for preventing people from 
doing what they want to do is right. 

To examine here all the thousands of positive 
arguments which have been brought forward 
in favour of discriminating Protection at 
different times and in different countries is of 
course impossible. All that can be done with 






advantage is to draw attention to their great 
variety and inconsistency. In each country 
at any particular time the arguments accepted 
by protectionists are just those which appear 
to show that the particular form of specializa- 
tion to which the country is at that time 
tending to devote itself is bad for that country 
if not for every country. Thus in a country 
of which the inhabitants, when uninfluenced 
by protective duties, on balance export agri- 
cultural products and import manufactured 
produce, the reigning school of Protectionism 
is always found asserting that it is obviously 
ruinous to specialize in this way on agricul- 
ture ; while in a country of which the inhabi- 
tants, also uninfluenced by protective duties, 
on balance export manufactures and import 
agricultural produce, the assertion is that it is 
disastrous to specialize on manufactures and 
" neglect agriculture " or " allow it to fall 
into decay,'' since it is obviously necessary 
for national security and the physique of the 
people. The fact that arguments in favour of 
discriminating Protection are found in every 
country, whatever its circumstances, is sus- 
picious, the more so when we reflect on the 
support they get from the self-interest of those 
sections of the people which would gain by 
them either for a time or permanently. There 
is a presumption in favour of people being 
allowed to do what they wish, but this does 
not extend to allowing some people to pass 
legislation to prevent others from doing what 
they wish. 

There is, however, one general argument in 
favour of a particular sort of discriminating 
Protection which has obtained such wide accept- 

ance that it is worth while to examine it shortly. 
This is the argument in favour of " protection 
to infant industries." It has been said by 
J. S. Mill and others that an industry may 
be very suitable for a country and yet unable 
to start there because imports of the commodity 
which it produces come in from other countries 
in which it has become well established, and 
in such circumstances it may be proper to 
restrict imports for a time, until the " infant " 
can stand competition. Economists who would 
call themselves free-traders have often admitted 
this as an exception to their general rejection 
of Protection. Very little, if any, force really 
resides in it. So far as it goes, it justifies 
local just as much as national protection to 
infant industries : an infant industry may find 
it difficult to establish itself in Yorkshire 
because the products of that industry come in 
from Lancashire, or in California because they 
come in from Massachusetts. Secondly, it is 
wrong to assume that the mere fact of the 
advantage of the country from which the pro- 
duct is exported being an acquired rather than 
a natural advantage is a reason for endeavour- 
ing to counteract it. A great deal of territorial 
division of labour inside national areas now 
rests only on the acquired characteristics of 
places and their inhabitants, and nobody thinks 
any the worse of it for that. For example, 
if some place in England just as well adapted 
by nature as Lancashire for the seat of the 
cotton manufacture were now discovered, no 
one would think that a good reason for moving 
that manufacture. There is just as much reason 
for allowing acquired advantages to count when 
the question is one of the specialization between 






nations. Thirdly, it is doubtful whether the 
supposed difficulty of starting an industry really 
exists, and whether, if it does, Protection is the 
best way of reducing it. When a good deal 
of a thing is imported into a country, it is 
easier for a home manufacturer to slip in with 
an article slightly better adapted for use in the 
country than it is for him to devise the article 
and " create a market " for it where imports 
are kept out. If the need of encouragement 
were clearly proved, it would seem better 
to give the encouragement by way of bounty 
or other direct assistance, as this is more likely 
to be withdrawn when the assistance has done 
its work or is proved to be useless. 

The most plausible of all general protec- 
tionist arguments is one which is seldom put 
forward. This is that it must be a good plan 
to protect those industries in which labour is 
best paid, so that the country will specialize 
in the best paid occupations : products of 
coarse, rough labour will be imported free, 
while the products of highly skilled, well 
paid labour which are imported will be 
heavily taxed. So the labour of the people 
of the country will be confined to 
the highly paid work as much as possible, a 
highly desirable consummation. Now, no 
doubt, every well-disposed parent wishes his 
children to be engaged in well paid occupa- 
tions, and we may agree that the State should 
wish the same for the inhabitants of its terri- 
tory. But would it be reasonable for a parent 
who had taken no trouble and incurred no 
expense in the education of his children to 
assemble them and say, *' My sons, on no 
account employ a dentist or a lawyer. Be 

your own dentists and lawyers : let Jack attend 
to your teeth and Tom to your legal business. 
The work is much better paid than the unskilled 
work which you usually work at. It is true 
that you will not get any one outside the family 
to employ you as dentists or lawyers, as you 
will be rather unskilful, but you can at any 
rate keep your own work inside the family." 
It is clearly better to be a competent rivetter 
or even a competent jam -maker than a quite 
incompetent dentist or lawyer, at any rate when 
the interest of the customer as well as that of 
the worker is taken into account. A people that 
is competent to follow the better paid trades 
is sure to do so : the only way to secure that 
the people of a particular country shall do the 
best paid work of the world is to give them 
the highest intelligence and the best possible 
special training. 

Considerable support is obtained for Protec- 
tion in consequence of the existence of a belief 
that export and import duties afford each 
country means of taxing all the others, or " tax- 
ing the foreigner " as it is commonly expressed, 
this belief being combined with a somewhat 
confused impression of the connection between 
such duties in general and protective duties in 
particular. A dispassionate outside observer 
might suppose that considerations of justice 
would deter people from discussing the question 
of the practicability of taxing the foreigner. 
As 1 have already remarked, it has long, except 
in a few isolated parts of the world, been con- 
sidered wrong to eat the foreigner : almost 
everywhere it is now thought wrong to reduce 
him to slavery : if he is of the same colour, 
it is even thoug'ht wrong to deprive him of his 



. I 


land or other property. But as yet, scarcely 
any one is ashamed to say that he would be 
delighted to tax the foreigner if only he could 
discover a way of doing it. I suppose the 
defence of this attitude which would be put 
forward, if any one thought defence was neces- 
sary, would be that the foreigner's wicked 
aggressive designs put the country of the 
speaker to an expense far greater than could 
be met by anything likelv to be got out of him 
by this method : but the defence is quite in- 
sufficient, as the readiness to tax the foreigner 
is found almost as much when the foreigner is 
obviously unaggressive, and even when he is 
an ally or even a member of the same federa- 
tion flying the same flag in war. 

In considering the practicability of taxing 
the foreigner by duties on foreign trade, every 
one must recognize that money cannot be 
directly collected from people living outside 
the jurisdiction of the State imposing the 
duties. The hope is simply that the duties will 
make the terms of the trade more favourable 
to the people of the country, or in other words, 
that they will make the foreigners take less 
for the goods which are imported into the 
country and give more for the goods which are 
exported from it. 

It is easy to conceive circumstances in which 
a number of persons, small or large, owning 
the resources of a particular area, may sell their 
products dearer when they act in combination 
than when they compete. Suppose these people 
have a number of springs of some mineral 
water of highly curative properties which is 
not found and cannot be manufactured any- 
where else. If the springs belong to a number 



of competitors, the whole of the water produced 
will be sold, say at 6d. a gallon : but the 
demand may be of such a character that if 
the price at which the water were offered to 
the buyers was raised to is. a gallon, three- 
quarters of the whole could still be sold : it will 
then pay the owners to combine and raise the 
price to is., although they have to let 25 per 
cent, of the water run to waste or drink it them- 
selves. Now this is just the principle of the 
plan of " taxing the foreigner " by means of 
an export duty : instead of assembling all the 
producers of a particular commodity in a 
country and persuading them to enter into some 
complicated agreement for restricting exports, 
the government of the country takes the simpler 
and more effectual course of restricting exports 
by imposing the payment of a duty (propor- 
tioned to the amount exported) on every one 
who chooses to export the commodity ; it is 
hoped that the foreigners will be forced by the 
reduction of quantity exported to give a higher 
price per unit. So, for example, if the character 
of the foreign demand were as just supposed, 
and the export duty caused a reduction ot 
25 per cent, in the quantity exported, so that 
the foreigners gave is. a gallon instead of 6d., 
the " foreigner would be taxed " to the extent 
of 6d. a gallon. The country as a whole, 
i.e., the people in their individual and their 
corporate capacity, would trade on better terms, 
since it would be better for the owners of the 
springs and the government together to re- 
ceive IS. per gallon for 75 than 6d. per gallon 
for 100 gallons of the water : the total received 
would be 50 per cent, greater than before, and 
the people inside the country could, if they 




chose, drink the quantity now cut off from the 
exports.' Thus an export duty may tax the 
foreigner, and it may be profitable to impose 

But the example just given is clearly an 
exceptional one. Few commodities are like 
rare natural mineral waters. Take instead the 
case of a number of persons living together on 
a certain area and producing potatoes. Would 
it be likely to pay these persons to combine 
together and try to raise the price to their 
outside customers? Clearly not. They would 
not expect to be able to get a halfpenny a 
sack more for their potatoes, however much 
they restricted the quantity they sold. This 
is what happens with export duties on ordinary 
commodities : whether they restrict the exports 
from the particular country little or much, they 
fail to raise appreciably the price at which the 
foreigner purchases, because they only touch 
a trifiing fraction of the whole supply to the 
world outside the country imposing the duty, 
and this trifiing fraction can be made up from 
some other source without appreciable increase 
of cost and consequently of price. 

Circumstances, again, are conceivable, 
though extremely unlikely, in which a number 
of persons living on an area could buy some 
commodity cheaper if they acted in combina- 
tion than if they competed. They might be 
the only people in the world who wanted that 

' In order to sell within the country the 2^ per cent, cut off 
the exports, the owners of the spring's will have to sell at less 
than 6d. a gallon, and consequently the duty required to raise 
the price to the foreigner by 6d., as supposed in the text, will 
have to be more than 6d. : how much more, will depend on the 
elasticity of the home demand. 



commodity, and it might be one of the 
numerous commodities which would be cheaper 
even in the long run, if less were bought ot 
it. Suppose, then, that tea is such a commo- 
dity that the tea -consumers left to their indi- 
vidual volition would buy 7 lbs. per head per 
annum at 2s. per pound, and further that it 
they resolved to buy only 5 lbs. per head the 
price would fall to is. 6d. It follows that if 
they made and carried out this resolution, they 
might fairly say they had "taxed the 
foreigner" to the extent of 6d. per pound, 
and as they would have to spend 6s. 6d. less 
on tea while only forgoing 2 lbs. in their 
consumption, they would probably be gainers 
on the whole transaction. Now this is pre- 
cisely the principle of the proposal to tax the 
foreigner by imposing an import duty. The 
duty is intended to check the demand, and it 
is supposed that the foreign producers will be 
obliged by the reduction of demand to sell 
the reduced quantity at a lower price per unit, 
being thus " taxed " to the extent of the 
difference in price, and that the fall of price 
on the reduced quantity taken will be more 
. than sufficient to counterbalance the privation 
caused by the reduction of quantity. Suppose, 
as before, that the commodity is tea, and the 
consumption 7 lbs. per head when there is no 
duty and the price inside the country 2s. A 
duty of IS. is then put on imports : the 
price at home rises to 2s. 6d., of which the 
foreigner only gets is. 6d. in consequence ot 
the reduction of consumption from 7 lbs. to 
5 lbs. per head. Then the foreigner may 
be said to be taxed to the extent of 6d. per 
pound : the tea -consumers have lost 2 lbs. 


of tea and only spend is. 6d. less upon tea, so 
that they are certainly worse off, but as the 
State gets 5s. out of what they now pay for 
tea, the change is probably a profitable one to 
tea-consumers and taxpayers considered as one 

The trouble, however, from the point of view 
of any one who desires to " tax the foreigner " 
in this way is to find a commodity and condi- 
tions such as those described. A much more 
hkely result of the shilling tax on tea, even if 
It were imposed by the country which consumes 
most tea, would be that the price outside the 
country would only fall permanently bv |d. a 
pound, vyhile the price inside the country rose 
ii^d. with a fall of consumption to 5 lbs. per 
head, m which case the foreigner might still 
be said to be taxed Jd. per pound, but the gain 
at his expense would probably not be worth 
making, as it would probably be more than 
counterbalanced by the disagreeableness to the 
people of having a particular branch of their 
consumption so sharply attacked by the tax 
instead of being allowed to spread the burden 
of taxation as they pleased. In the usual con- 
ditions, the imposition of an import duty by 
any one country will make no appreciable 
difference to the outside or " world " price of 
the article taxed, and, of course, in some con- 
ditions the imposition of such a duty might 
absolutely raise the world price. 

I have for simplicity taken in the first place 
an example in which the import duty is not 
protective. Where it is protective it is no 
more likely to be beneficial in the manner 
supposed than when it is not. About one-fifth 
of the wheat consumed in the United Kingdom 



is grown within the country, because that 
amount, and no more, can be grown there 
profitably (or so as " to pay " all the factors 
concerned more or at least as much as they 
could get in other employment) at the price 
which can be obtained. Suppose it pays to 
produce seven million quarters at 31s., and 
that it would pay to produce eight at 32s., 
and so on, till at 80s. a quarter it would pay 
to produce all demanded at that price and 
make the country independent of importation. 
It is evident that if the elasticities of demand 
inside the country and the conditions of supply 
outside it were the same for tea and wheat, any 
given percentage of ad valorem duty would 
diminish the British importation of wheat more 
than that of tea, since the home production 
would increase and to some extent supply the 
void. The greater reduction of British demand 
would cause a greater, though probably still 
almost inappreciable, fall in the outside price, 
but it must be remembered that the less taken 
of the commodity, the less the aggregate 
amount which the foreigner can be said to be 
" taxed." 

On the whole, it may be said that the possi- 
bilities of getting anything out of the foreigner 
by import duties are so small that they are not 
worth setting against the usual fiscal considera- 
tions, with regard to the distribution of taxation 
between different classes of consumers and 
persons of different wealth. 

The conclusion is that Government manipula- 
tion of foreign trade, whether in order to give 
employment, to select the best industries for 
the country, or to tax the foreigner, is not 
likely to have good results, however excellent 








11 J 

r^ 'I 

the legislature of the country ; and we shall 
feel even less confidence in the probability 
of good results when we reflect upon the imper- 
fections and fallibility of the actual legislatures 
of the different countries of the world. We 
must beware, however, of exaggerating the evil 
effects which have actually resulted. A great 
deal of the trade which is prevented from 
taking place by Protection is not very 
important ; it consists of the exchange of com- 
modities — such as different kinds of thread — in 
regard to which international localization is 
advantageous indeed, but not enormously 
advantageous. When Protection stands in the 
way of something more important, such as the 
urbanization of England in the nineteenth cen- 
tury, it breaks down. Moreover, under 
modern conditions in which extensive migra- 
tion and conscious regulation of births are both 
possible, no State can by erroneous foreign 
trade policy, whatever its folly, permanently 
make the condition of its working -classes — that 
is, the mass of its population — seriously worse 
than that of the working-classes of other 
countries. They leave or refuse to multiply 
till their condition is brought up by the want 
of competition to the level prevailing in the 
other countries. The inquiries which were 
carried on at the beginning of tlie twentieth 
century by the British Government and other 
persons, with the idea of finding out by obser- 
vation and statistical examination of the condi- 
tion of the working-classes in England, France, 
Germany, and the United States which country 
had the best fiscal policy, were ridiculous in 
the extreme. The effect of bad fiscal policy 
in any one of these countries would only be to 



make its population and the value of its land 
somewhat less than they otherwise would be- 
not, of course, necessarily to make them 
decline nor even to increase less rapidly than 
those of the other countries— and this effect 
could not be proved by statistics. 

The question, " What then does determine 
the comparative wealth of the inhabitants of 
different areas?" can best be approached by 
beginning with the smallest possible exaniple, 
that in which the territory is so tiny that it is 
only inhabited by a single family. Let us ask 
ourselves what determines the material welfare 
of the inhabitants of some spot, it may be of 
a few acres or only of a few yards in extent, 
when those inhabitants consist, say, of a man, 
his wife, and their young children. Every one 
will recognize at once that this is a personal 
matter, dependent on the original qualities ot 
the persons concerned, their energy and in- 
dustry the occupations for which training has 
fitted them, and finally the amount of property 
which they own. We should not think ot 
attributing differences simply to the fact that 
one family lived on an infertile area, another on 
a fertile one, nor to the fact that one lived 
where there were no minerals at all and the 
other at the mouth of a coal or gold mine We 
should expect such differences in natural sur- 
roundings to be counterbalanced by differences 
in the rent the families would have to pay if 
they did not own the land, and if they did own 
the land we should regard the resulting differ- 
ences as the consequence of differences in the 
amount of property held by them, just as much 
as if the property they owned was somewhere 


256 thp: wealth of nations 

else. Nor would any one think of attributing 
the superiority of .one family over that of 
another to the one having adopted a superior 
;' fiscal policy." The idea of " fiscal policy " 
in relation to the single family would not be 
likely to occur to any one. Yet some at least 
of the id^eas embodied in the fiscal policies of 
the past and present could conceivably be 
carried out. The mediaeval maxim that money 
should on no account be allowed to go out of 
the country could be carried out if a family 
refused to buy anything from outside. The 
later maxim that trade must be so regulated 
as to bring .as much money as possible into 
the country by ^ " favourable balance " could 
be carried out much more easily by a family 
than It ever could be by a State ; all that 
would be necessary would be for the family to 
be careful not to spend in purchases as much 
money as it got by sales, and not to lend out the 
surplus nor even deposit it in banks, but pat 
the money in .a stocking or a hole in the 
ground. The self-sufTficiency .of the territory, 
which the advocates .of one fiscal policy desire 
so strongly, could ,be obtained in any required 
degree by abstention from purchases of com- 
modities and services, .even when it was 
evidently easier to procure these things by 
the mdirect method of making other things, 
selling them for jnoney, and then buying what 
was wanted with the money so obtained. 
Finally, full employment could doubtless be 
secured quite easily by simply attempting to 
produce everything required on .the given spot ; 
the employment might not receive much 
remuneration, but that is another matter, 
usually regarded as immaterial by the 



fiscaliters. All these ideas would seem ridicu- 
lous to the single family. 

Now let us take as examples the inhabitants 
of somewhat larger territories, such as English 
counties. To give a touch of reality we will 
take two actual counties, Hereford and Durham, 
but we need not trouble about the precise facts, 
nor even commit ourselves to any opinion on 
the question whether the people of Durham or 
Herefordshire are actually the better ofif. All 
we have to do is to consider the main factors 
on which the answer to that question must 

First among these factors we may mention, 
as in the case of the single families just above, 
the difTerent original qualities of the two groups 
of inhabitants. Inferiority in ef^ciency is con- 
stantly given as the explanation of the lower 
earnings of one large group of persons as 
compared with another large group carrying 
on the same kind of work in a different place. 
It is commonly said, for example, that the 
superiority of agricultural wages in the North 
of England is due to the greater efficiency of 
the workers. If the people of Durham are, 
on the average, gifted with greater strength 
of mind or body than the people of Hereford- 
shire, we should expect them to earn more in 
the same time and so to be better off. Whether 
the two groups produce for their own con- 
sumption or for sale to others outside their 
territories will make no difference. If for their 
own consumption, the group producing most 
will obviously be better off than the other ; 
if they sell to outsiders, they will have to sell 
in the world -market and consequently at the 

same price, 


1 1'' 



' ' 

The only difficulty liere is to account for the 
differences in personal qualities. Climate, no 
doubt, may have some influence. The Durham 
men, some will say, are superior because they 
live in a colder and drier part of the country, 
but there is probably little in this. Others 
will speak of differences of race, and say the 
Durham men are taller and stronger in conse- 
quence of the immigration of Northmen more 
than a thousand years ago ; this is probably 
more important, though the assimilation of 
races by migration and intermarriage inside 
England has been proceeding for all that time. 
Possibly, too, the fact that the population of 
Durham has been increased largely by immi- 
gration, while Herefordshire has not attracted 
immigrants nor even retained its natural in- 
crease, may be supposed to favour the efficiency 
of the Durham population. It is usually 
thought that the people who migrate are 
superior to those who remain at home, and if 
this is so (it can scarcely be regarded as 
proved) a population largely consisting of 
immigrants, and possibly even a population 
consisting of the nearer descendants of immi- 
grants, should be superior in quality to one 
consisting more entirely of natives and the 
descendants of natives. There is also usually 
less inbreeding among a population which is 
gaining by migration, and inbreeding is often 
considered inimical to efficiency. 

Secondly, as in the case of the single family, 
we have to think of the different occupations 
of the inhabitants of the two territories. Here- 
fordshire is a county inhabited chiefly by agri- 
culturists and persons whose trade must be 
carried on in the vicinity of agriculturists, 



The only town of any magnitude is the county 
town, and that is little more than the necessary 
commercial and legal centre of such an agri- 
cultural district. But Durham, which has an 
agricultural population of nearly the same size 
as Herefordshire, has in addition about two 
persons engaged in shipbuilding and seven 
engaged in mining to every one engaged in 
agriculture. It follows that the comparative 
material welfare of the inhabitants of Durham 
and Herefordshire must largely depend on the 
material advantages of the agricultural occupa- 
tions compared with those of shipbuilding and 
mining. If shipbuilders and miners are better 
off than agriculturists, the people of Durham 
will be better off than the people of Hereford- 
shire. Consequently we have to ask ourselves 
why the inhabitants of some districts submit to 
belong chiefly to the poorly paid occupations 
while the inhabitants of other districts manage 
to adopt the better paid. We may, I suppose, 
attribute some small part of the phenomenon 
to differences in efficiency. The less efficient 
people are less likely to bring up each new 
generation to the best paid kinds of work than 
the more efficient. But this is a trifling matter 
compared with the simple fact that it is con- 
venient for persons carrying on one trade to 
live and work principally or wholly in some 
places, and for people carrying on other trades 
to live and work principally or wholly in other 
places. It is not because the people of Here- 
ford are weak, stupid, and wanting in energy 
that Hereford has not as many miners and ship- 
builders as Durham, but because it has neither 
coal jior sea-coast. It is not because the 
inhabitants of Oxfordshire and Cambridgeshire 







have some hereditary cleverness that they 
happen to contain an extraordinary proportion 
of well-paid teachers, but because some long- 
forgotten accident placed the two Universities 
in the county towns. It is not owing to the 
enervating nature of the climate of Poplar 
and West Ham, nor to the inferior character 
inherited from the particular Anglian families 
who settled there in the fifth or sixth century 
that those districts contain a large proportion 
of the worst-paid class of manual labour, but 
because the docks are there. The inevitable 
conclusion is "that geographical features and 
those incidents which, because we knovv very 
little about them, we call historical accidents, 
play a great part in settling whether people 
who are well paid for their labour or people 
who are ill paid live in any given district. 

Thirdly, again as in the case of the single 
family, the differing amounts of property owned 
by the inhabitants of different territories is 
an important factor in determining their com- 
parative material welfare. The amount owned 
by the inhabitants is not to be confused with 
the amount of property apparently situated 
within the territory.' In Durham there is con- 
siderably less property liable to local rates 
under the English law per head of population 
—about £125 worth (in capital value) against 
£200 worth per head in Herefordshire. Move- 
able tangible objects, together with such in- 

' I say " apparently " situated, because a great deal of pro- 
perty in modern times cannot be cut up and have its several 
parts attributed to the different small localities in which as a 
whole it is situated. At first sight it appears possible to allocate 
it, but the experience of the American property taxes shows 
that the possibility is only apparent. 



tangible property rights as might be supposed 
to be somehow connected with the fixed 
property, are probably more important in 
Durham than in Herefordshire, and might thus 
restore the balance. But if we found that the 
total property thus connected with the two 
counties worked out to exactly the same value 
per head of population, should we be justified in 
assuming equality between the two populations 
so far as property was concerned? Certainly 
not, since the inhabitants of each county own 
much property outside it, and many persons 
who are not inhabitants own much property 
inside it. Equality would only be present if 
the balance of the two amounts was the same 
in the two counties. In fact, the balance is 
probably in favour of the inhabitants of 
Herefordshire. It is probable that the amount 
of property held outside Herefordshire by in- 
habitants of Herefordshire exceeds in value the 
property within Herefordshire held by people 
living outside, whereas the contrary is probably 
true of Durham. Does any one ask why this 
should be so? Simply because owners of 
agricultural properties find it pleasant and con- 
venient to live on them, while owners of mining 
and shipbuilding properties do not. Neither 
a colliery nor a shipyard are pleasant things 
for a wealthy person to live alongside of, and 
there is the further fact that the shipyards 
belong largely to shareholders whose avoca- 
tions lie elsewhere. There can be no doubt 
about the importance of this cause of difference 
whenever small territories are under com- 
parison. The inhabitants of Mayfair are richer 
than those of Wapping because a richer class 
of persons select Mayfair for their residence. 




\ n 

The average wealth of the people of Sussex 
is increased by the fact that it is a pleasant 
place of residence and convenient for London 
work or amusement. The parish of Dornoch 
must have the wealth of its inhabitants enor- 
mously increased, and the county of Sutherland 
must have the wealth of its inhabitants con- 
siderably increased simply by the fact that Mr. 
Carnegie chooses to live at Skibo Castle 
instead of nearer the sources of his riches. 

This is all fairly simple, l^he only question 
is whether in the case of territories as large as 
English counties it is true, as in that of the 
srnallest possible localities, that we should not 
think of attributing the superiority in material 
welfare of one whole population over that of 
another directly to the fact that the one lived 
on an area which was more fertile or contained 
a better or more accessible underground store 
of minerals than the other. What the question 
comes to in our example is this : Are the 
natural advantages of Durham over Hereford — 
its possession of coal and a sea-coast with 
harbours — entirely appropriated by the owners 
of property (whether resident in Durham or 
elsewhere), or is there a certain part which is 
unapi3ropriated and consequently obtained by 
the mere propertyless workers.? The question 
is not to be disposed of by a negation based 
on the proposition that if there were any such 
unappropriated item workers would migrate into 
Durham, with the effect of cheapening work 
and raising the value of property so that the 
unappropriated item would become appro- 
priated. This migration into Durham is pre- 
cisely what did take place for many years 
prior to 1881 : so long as it went on it 



showed that Durham was attractive, and the 
fact that it was attractive was due to there 
being something unappropriated which the 
workers managed to get. But as between one 
English county and another a very small advan- 
tage will turn the scale in the matter of migra- 
tion. Migration such as is required does not 
mean the rooting up of middle-aged people, 
but only a slight trend of the annual new 
recruits to the army of labour in one direction 
rather than in another. Moreover, though such 
attractiveness may endure for several genera- 
tions, it is properly regarded as a " temporary 
phenomenon. Durham in recent decades has 
not quite succeeded in retaining the whole ot 
the "natural increase" of its population. 
It is perfectly true that in time the immigra- 
tion into such a district will cause its advantages 
to the workers to sink to a level with those 

of other districts. , . j i, • 

If Herefordshire and Durham each had their 
own customs duties and had adopted different 
" fiscal policies," the advocates of the Durham 
policy would contend that the inhabitants of 
Durham were much better off than those of 
Herefordshire, and that the superiority of their 
condition was entirely due to their fiscal policy : 
the advocates of the Herefordshire pohcy would 
contend that the inhabitants of Herefordshire 
were much better off than those of Durham, 
and that this was entirely due to the Hereford- 
shire fiscal policy being superior to that of 
Durham. The important considerations which 
we have just deah with would be ignored 
altogether unless the difference in material 
welfare between the two counties was so great 
that one of the two parties lost all hope of 


being able to show that the county which had 
adopted the poHcy it favoured was, in fact, the 
better off. In that case this party might begin 
to point out that there were other things besides 
fiscal policy to be thought of, but this would 
be loudly hailed by the second party (and 
secretly regarded by the first party) as a last 
and almost desperate resource. As things are, 
neither county having had the opportunity of 
adopting any fiscal policy, no one troubles him- 
self about the facts, and no one is able to 
contend that the superiority of the one county 
over the other is due to its greater wisdom 
m fiscal matters. 

But if statistics of imports into and exports 
out of each of these counties were collected and 
made available, it is certain that in each county 
persons would be found to contend that it would 
go to ruin unless it carefully regulated its 
foreign trade by means of customs duties. In 
the remote past these persons would have con- 
tended that as money was very useful to the 
people of the two counties, and there were no 
gold or silver mines within their boundaries. 
It was necessary to prevent any gold and silver 
going out of the county when it had once been 
got into it. Later, they would have contended 
that this was a mistake, but that what was really 
wanted was a careful attention to the balance 
of trade and such a manipulation of duties 
and prohibitions as would secure a perpetually 
favourable balance and consequent net importa- 
tion of gold and silver. Later still, when it 
had been conclusively shown by theory and 
experience that wherever there is a sound 
currency there will be a sufficiency of money— 
that, in other words, if legislators will look 



after the quality of the currency, the quantity 
will take care of itself— the advocates of the 
manipulation of external trade would have fallen 
back on special doctrines made up to suit the 
circumstances in which they found themselves. 
In Herefordshire, which exports agricultural 
produce and imports coal and manufactured 
articles, they would have contended that agri- 
cultural counties were always poor, and that 
the people of Herefordshire should therefore 
force themselves to become manufacturers or, 
at any rate, attract manufacturers from other 
counties by preventing themselves, either by 
prohibition or by duties, from buying manu- 
factured articles produced outside the county. 
In Durham, which imports agricultural pro- 
duce and exports coal and ships, they would 
have contended that it was necessary for the 
physique of tTie people of Durham that they 
should grow inside the county all the food they 
required, however numerous they might be, 
and that their exportation of coal meant that 
they were living on their capital and providing 
their shipbuilding competitors with fuel to their 
own damage. The advocates of manipulation 
in each county would have shut their eyes to 
the fact that the advocates in the other were 
using arguments inconsistent with their own, 
and their opponents would in all probability 
have neglected to draw attention to the fact, so 
that the question at issue would have escaped 
all discussion on broad lines. While incon- 
sistent arguments based on the special cir- 
cumstances of each county were being used 
in this way, there would also have been some 
attempt in both counties to prove that if 
customs duties were imposed upon the importa- 






tion of almost any article, an appreciable 
portion of the duty would be paid by the 
outside producers, so that the people of each 
county would gain something at the expense 
of all the others by imposing import duties, 
though it might possibly be better for all the 
counties taken together to agree to refrain from 
imposing any. In the fortunate absence of 
statistics of imports and exports, no one in 
either Herefordshire or Durham seems ever to 
have thought of advocating a " county policy " 
which should enrich the people of the county 
at the expense of outsiders. 

We may now proceed to examine the case 
of " nations "—groups of persons inhabit- 
ing areas usually larger than those of the 
biggest English county and invariably possess- 
ing independent systems of customs duties. 
There is no reason for supposing that the cir- 
cumstances which we found to be the main 
factors in determining the comparative material 
welfare of the inhabitants of a couple of English 
counties are not also the main factors in deter- 
mining the comparative material welfare of 
" nations." 

In the first place, there is the difference in 
the efficiency of the various nations due to 
difference of racial qualities and to the climate 
of the territory occupied. Of course, to explain 
a difference in efficiency as the result of original 
difference in racial quality does not take us 
very far. To complete our knowledge we ought 
to know why races with small efficiency have 
settled in one place and races with great 
efficiency in another. But in the present state 
of knowledge we cannot say much about this. 
All the earlier wanderings of the different stocks 

of mankind are wrapped in obscurity. We 
know a great deal about the reasons why the 
present North and South Americans are what 
they are, but we know very little about the 
reasons why Germany contains Germans, India 
Indians, and China Chinese. Nor can we say 
much about the probabilities of the future. All 
that seems certain is that at present it is 
becoming more and more difficult for one stock 
to 'destroy another or violently dislodge it from 
a territory which it has once occupied. There 
are few stocks now left which are likely to 
yield place to others with the rapidity and 
completeness of the Red Indians and the 
Australian aborigines. It appears likely that 
there will be a very slow amalgamation of 
various stocks, and that while this is going on 
others will decline imperceptibly till nothing 
is left of them. But meantime we are perfectly 
justified in treating original differences in racial 
characteristics as a cause of difference in effi- 
ciency, and consequently in material welfare. 
Original racial qualities are constantly being 
modified by migration, and if we take the 
view that inbreeding is likely to produce 
inefficiency and " new blood " is Hkely to 
produce efficiency, we may suppose that a 
countrv into which there is a net immi- 
gration is more likely to have efficient inhabi- 
tants than one from which there is a net 
emigration, since, ceteris paribus, there will be 
more new blood in it. And if it is true, as often 
alleged, that emigrants are generally superior 
to stay-at-homes, the country of immigration 
will tend to be superior to that of the country 
of emigration from that cause also. 

The effects of climate are doubtless much 



more important in regard to the inhabitants of 
"national " territories than in regard to those 
of smaller territories such as English counties. 
We have no hesitation in attributing any want 
of efficiency which we find in Italy or India 
compared with colder and drier countries to 
the '' enervating " character of the climate of 
a large part of those countries. But it is well 
to be cautious in this matter. It seems possible 
to live up to any given standard with less labour 
(of a given efficiency) in warm than in cold 
climates. The clothing, the shelter, and the 
food required are all less in amount. Conse- 
quently the refusal of the inhabitants of the 
warm country to work as strenuously as the 
inhabitants of the cold country may be the result 
of deliberate and wise choice rather than of 
incapacity. We must remember, too, that the 
eftects of climate are awkwardly mixed up with 
those of original differences of race, since it 
is doubtless true that the most energetic races 
have on the whols been the most successful in 
securing, not perhaps always " places in the 
sun," but, at any rate, situations in the 
surroundings, including climate, which they 
•imagined to be the best. 

Whatever may be the truth with regard to 
the comparative importance of climate and 
original racial qualities, it will scarcely be ques- 
tioned that the difference in efficiency resulting 
from the differences in these two circumstances 
is a more important factor in determining the 
material welfare of nations than in determining 
that of territorial groups of inhabitants inside 
the nations. But it is desirable to bear in mind 
that this is not because the nations are political 
units or because they have each a customs 


system of their own, but simply because they 
are bigger . If we had to divide the world into 
territories which differed in the extent to which 
the efficiency of their inhabitants was favoured 
by racial qualities and climate, we should use 
divisions still bigger than nations and disregard 
a Rood many international boundaries. ine 
longest boundary in the world between two 
nations, that between the United States and 
Canada, would be disregarded, and so also 
would many of the intra -European boundaries 
Secondly, in regard to nations, as in regard 
to the inhabitants of smaller areas, we have to 
think of the occupations of the inhabitants 
The time when it was possible to suppose each 
nation providing for practically all its own 
warns directly is past. Then it was legitimate 
to assume that the occupations of ditierent 
nations were all the same except in so tar 
as the richer would be able to devote a rather 
larger proportion of the whole of their labour 
to producing the less necessary articles Now 
the growth of international trade means that the 
people of one nation produce things largely tor 
other nations as well as for themselves. Each 
people becomes to some extent specialized, pro- 
ducing commodities and even services which 
to a great extent are not consumed at home but 
are sold on the world -market. It follows that 
the wealth of the inhabitams of a national 
area is largely affected by the occupations fol- 
lowed by them. If, from whatever reason, 
they are predominantly engaged in occupations 
which are the poorly paid occupations of the 
world, their wealth will be, so far, less than 
if they were chiefly employed in the highly 
paid occupations. 



The chief actual difference here arises from 
the fact that certain countries are more suitable 
than others for the residence of the well paid 
commercial class. Just as the wealth of 
London is swollen by the fact that its geo- 
graphical position has made it a convenient 
place in which to carry on the commerce of the 
world, so, though of course to a less extent, 
is the wealth of the United Kingdom swollen 
by the fact that London is in it. A good deal 
of historical change in the comparative position 
of different nations is due to the fact that 
progress in knowledge and the spread of 
population has altered the relative advan- 
tageousness of the different parts of the world. 
The shores of the Mediterranean at one time 
had the advantage in this respect : the dis- 
covery and use of the way round the Cape 
improved the relative position of this country 
and the Netherlands : the Suez Canal perhap,s 
worsened it and benefited the European conti- 
nent : the Panama Canal seems likely to 
improve the position of the United States. 
Railways, of course, have immensely benefited 
inland countries compared with maritime ones. 
Even in manual occupations there is a differ- 
ence between different nations which causes 
some to earn less than others with only equal 
efficiency. It is obvious that in some countries 
agriculture and other poorly paid manual occu- 
pations engage a larger proportion of the popu- 
lation than in others. A country which 
exported nothing but wheat would have, ceteris 
paribus, a poorer set of inhabitants than one 
which exported nothing but mathematical and 
astronomical instruments. But the range is 
not very great here, and on the whole we must 



pronounce this cause of difference to be of less 
importance in regard to nations than in regard 
to smaller areas, such as English counties 

Thirdly, we have differences arising trom 
the different amounts of property held by the 
inhabitants of the different countries. Ihis 
has long ceased to be almost entirely deter- 
mined by the number of people in the country 
and the amount of property within the country 
It may happen, as it happened to the Transvaa 
when it was a separate country, and /till 
happens, though in a less degree, toj the Umon 
of South Africa, that an overwhelming pro- 
portion of the valuable natural resources of 
the country and of the instruments used in 
working them belong to people who are not 
resident in the country : or that ^^me x^\u^h\e 
property within the country, though it belongs 
to the inhabitants, has been provided with bor- 
rowed money, on which interest has to be paid, 
as is the case in India and Australia. And on 
the other hand, the inhabitants of a country 
often hold property abroad, as happens in the 
case of the United Kingdom, the inhabitants 
of which draw more than £2 a head from their 
property outside the country. Monte Carlo is 
probably the richest country in the world owing 
to this cause, but for the larger countries it 
cannot amount to very much, being only at the 
extremes two or three pounds to the good and 
probably not more to the bad. 

It is very important all the same, because it 
means that the income of the inhabitants of 
a country is not, as we are apt to^ think, depen- 
dent on the value of the things therein. There 
is no necessary connection between the two. In 
modern civilization the inhabitants of a country, 





as such, do not own the country and all that is 
therein : they simply own their property where- 
ever it may happen to be situated : the people 
who own the country are the proprietors, 
wherever they may happen to live. 

Fourthly, there may be some temporary but 
possibly very long-continued difference of earn- 
mgs owing to some countries being " new *' 
and others " old." By a " new " country we 
seem to mean one which has not been open to 
settlement from the parts of the world settled 
earlier for a time long enough to allow migra- 
tion to fill it as full as the '* older " parts. 
Owing to the somewhat smaller repletion of 
these territories with human beings, the natural 
resources are not quite of such high value as 
they would be if they were situated in long- 
settled parts. The fertile virgin soil in Alberta 
is not worth as much to its proprietors as it 
will be when the distribution of population be- 
tween the Eastern and Western Hemispheres 
has been rectified by a few more decades or 
perhaps centuries of migration westward. 
Meantime the mere workers who go get a slight 
advantage over those who stop at home. If 
they did not there would be no attraction. The 
attraction is really afforded by the migrants 
receiving a small share in the value of the 
natural resources. 

So apart from any superiority in efficiency, 
such as I suggested exists in a country of 
immigration, we may expect to find some 
superiority of earnings in new countries from 
this cause, just as I showed we might expect 
it in an English county occupying a position 
like that of Durham in the decades before 
1 88 1. As between nations we should expect 

this to be more important than as between 
counties, since the migration is less easy. 
The movement from Europe to America has 
been going on for centuries and is yet tar 
from complete. 

It is likely that the workers of the new country 
and their descendants, considered simply as indi- 
viduals, will benefit by the immigration of new 
workers, since these workers are always likely 
to be hewers of wood and drawers of water who 
produce things cheaply for the already estab- 
lished inhabitants. To oppose their arrival 
from the point of view of the intelligent indi- 
vidual is like opposing the arrival of horses : 
horses deprive men of some kinds of employ- 
ment altogether, but raise their remuneration 
by cheapening products which they consume 
If horses worked for wages, the arrival of 
further contingents would lower the wages of 
horses, but would do no harm but good to the 
men workers. In the same way, the arrival of 
Irish raised the position of previously estab- 
lished workers in the United States, and the 
arrival of Italians, Hungarians, and such-like 
raised the Irish already established there. 

But workers are apt to think of themselves 
as a class, especially if they have organizations 
of the nature of trade -unions, which neces- 
sarily represent a class rather than a number 
of individuals. Class feeling resents any lower- 
ing of the per capita income of the class, even 
when it is merely the result of the introduction 
of new members who have improved their own 
position by gaining admittance without worsen- 
ing the position of the individuals already 
within the class. Hence it is natura that the 
workers of new countries, especially when 




represented by their organizations, should 
favour restrictions on immigration. 

The most actually effective of restrictions on 
immigration are doubtless those which are 
inspired by race antipathy. They are imposed 
by people who say, " Which race is to fill up 
this continent ? Yours or ours ? We say 
ours." It may be possible that some of these 
can be defended on the ground that they 
segregate a race or races which have not as 
yet at any rate sufficient control over their own 
multiplication. If any people acts as if its 
ideal of progress was, in J. S. Mill's picturesque 
phrase, " a human anthill," it is probably 
desirable that it should be confined within as 
narrow limits as possible. It is better that it 
should learn that overpopulation is an evil, and 
how to avoid it, in one country or continent, 
than after extending it all over the world. 



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